Two Undervalued Home Furnishing Companies

12/08/2015 9:26 am EST

Focus: STOCKS

Matt McCall

Founder and President, Penn Financial Group

Solid housing numbers will spill over into secondary sectors such as the home furnishing stocks, so Matt McCall, of Penn Financial Group, highlights two small-cap names now trading at levels that are attractive for long-term investors who believe in the housing market theme.

The housing market has been moving in the right direction for several years as nearly every metric is improving in a slow, but steady fashion. The housing stocks have been outperforming the overall stock market with the iShares Dow Jones US Home Construction ETF (ITB) up 10% in 2015. The solid housing numbers will spill over into the secondary sectors that have also been able to benefit such as building supplies, furniture stores, etc.

One niche sector that has been holding up well, but lagging the housing stocks are the home furnishing stocks. Two such small-cap names are now trading at levels that are attractive for long-term investors who believe in the housing market theme.

Ethan Allen Interiors (ETH) operates as an interior design company as well as a manufacturer and retailer of home furnishings. The $812 million company has been starting to move higher recently, but an early year drubbing has the stock down 8% in 2015. Looking out into 2016, the stock could be considered undervalued and the upside potential is well above average.

The company is expected to earn $1.41 this year, a slight dip from the $1.45 per share it earned in 2014. Next year the bottom line should start to improve dramatically with the earnings per share estimate coming in at $1.70—a 20% increase—and by 2020 the seven analysts that cover the stock see earnings above $3.00. A lot can happen in the next five years, but the growth potential is there and therefore the current PEG ratio for the stock is an attractive 1.22. As an added bonus, the micro-cap stock pays a 1.95% dividend to shareholders.

Restoration Hardware (RH) is larger than ETH, with a market capitalization of $3.7 billion, putting it in the category of a mid-cap stock. Similar to ETH, the stock is lagging the market this year with a current loss of 4% after a big sell-off in November. The chart has major support in the mid-$80s, which is less than 10% from the current level, giving any potential investors limited downside.

Fundamentally, the stock trades with a low PEG ratio of 1.03 based on big earnings growth potential in the future. Looking back at 2013, the company earned $1.01 per share and this year the estimate is for $2.36. The expansion of earnings is expected to continue at a solid pace in the coming years as the 20 analysts that cover the stock expect earnings to increase by an average of 29% in the next two years. By 2020 the earnings per share expectation is at $7.27, approximately triple that of this year.

The niche sector of home furnishings is often overlooked and can get lumped in with retailers in general. While they are reliant on the health of the consumer, the niche business they operate in has several outside factors that can help or hurt bottom line performance. However, simply based on the trend of the housing market and the current valuations, both stocks look attractive for long-term investors.

Matt McCall, Founder and President, Penn Financial Group

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