Home improvement
If you take look at the rest of the sector you will see Ethan Allen isn’t the only housing recovery play with an inflated multiple. Flooring leader Lumber Liquidators Holdings Inc (NYSE:LL), has watched its price-to-earnings multiple soar since 2012.
While analysts are expecting growth over 20%, I have similar fears with this company. Should we begin to see the housing recovery slow down as a result of interest-rate increases, you would expect to see a decline in the affordability and sales of flooring. Part of the thesis for Lumber Liquidators Holdings Inc (NYSE:LL) has been the rising expectations of revenues resulting from home renovation in preparation for resale. However, if homeowners are looking to resell their homes, shouldn’t they be looking to install flooring which gives them the best bang for their buck? According to a number of online review websites, flooring sold at Lumber Liquidators Holdings Inc (NYSE:LL) is among the least desired, as recent quality issues have hurt the company’s reputation. More over, the quality issues have brought about new concerns regarding the safety of the flooring due to high concentrations of formaldehyde.
I would additionally be wary of the recently offered HD Supply Holdings Inc (NASDAQ:HDS), which made its appearance on the public market just last week. Once a piece of Home Depot, the company provides contractors and builders a large variety of stock-keeping units through its 600 locations across 47 states. While shares did price under the expected range, at $18 per share, the company still looks expensive, with a multiple of 30 times earnings. I remain fearful that public demand for the company has been as weak as it has been. The space in which HD Supply Holdings Inc (NASDAQ:HDS) operates is competitive to say the least, with competition arising from its past parent, Home Depot, through its Pro segment. If you’re looking to take a position in the company, I would wait until shares settle down from the IPO turbulence.
Wrap-up
While Ethan Allen Interiors Inc. (NYSE:ETH) may have performed well up to this point, I would be careful investing in the company today as it seems many broad economic headwinds will put the company in a tough position. As exuberance dissipates, I would expect to see multiple contraction as investors price in slowing growth. Investors should additionally avoid Lumber Liquidators and Home Depot Supply as the companies look expensive on a price-to-earnings basis relative to the industry.
The article Be Careful With This Housing Recovery Play originally appeared on Fool.com and is written by Nathaniel Matherson.
Nathaniel Matherson has no position in any stocks mentioned. The Motley Fool recommends Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. Nathaniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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