Top Picks 2018: Hooker Furniture (HOFT)

01/08/2018 5:00 am EST

Focus: CONSUMER

Douglas Gerlach

President, ICLUBcentral, Inc.

One of the primary beneficiaries of the multiyear rebound in housing has been the furniture industry. A top pick for 2018 is Hooker Furniture (HOFT), which dates to 1924 and is based in Virginia, notes Doug Gerlach, editor of SmallCap Informer.

Until 2015, the company growing sales at a modest rate of 3% annually with earnings per share soaring at a 32% clip as the housing market recovered.

A 2016 acquisition with Home Meridian will allow Hooker to reach faster growing distribution channels. Besides increasing Hooker’s diversification, the acquisition gives Hooker more exposure to faster-growing distribution channels such as e-commerce, warehouse clubs and contracting. 

About 32% of the company’s sales are for bedroom products. Sixteen percent is in the motion upholstery category, with 14% in the occasional/accents category and 11% in the dining category.

The U.S. housing market currently is amid a supply crunch, experts say, because of low inventory and high demand. Baby boomers are retiring and looking to downsize. Bolstering the demand side are continuing relatively low mortgage rates and a low unemployment rate.

For the next five years, we’re modeling 9% annual sales growth, close to the results for the most recent quarter. The additional growth markets Home Meridian provides for Hooker, such as in e-commerce and membership clubs, should boost sales gains.

We’re assuming EPS growth of 12% a year. Once the integration of Meridian is complete, Hooker should see savings from economies of scale (Hooker is still only a $600 million company), and the lowering of the corporate tax rate should help.

With the EPS forecast at $4.65 five years out and an average high P/E of 18.4, the stock’s price could reach almost $86. The potential return of 16.9% annually beats our goal of 15% annually for a small-company stock.

We expect most of the increase in stock price will come from earnings growth, but unlike many stocks in today’s market, we also expect a modest increase in the P/E from current levels.

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