The housing recovery is now on the way. According to S&P/Case-Shiller Home Price Indices, all three composites, including the National Index and the 10- and 20-City Composites, experienced double-digit annual growth, which were the highest annual returns since 2006. Investors might wonder what stock to buy to surf the increasing trend of the housing boom.
Recently, two Fool analysts, David Meier and John Reeves, recommended one stock that they thought would be a good candidate for the upward housing trend. It is Tile Shop Hldgs, Inc. (NASDAQ:TTS). Since the beginning of the year, Tile Shop has risen as much as 50% on the market. Is Tile Shop a good buy now? Let’s find out.
The highest comparable store sales growth
Tile Shop Hldgs, Inc. (NASDAQ:TTS) is considered a specialty retailer of more than 4,500 ceramic, porcelain and stainless steel manufactured tiles products, operating around 70 stores in 22 states in the U.S. Its typical store has around 23,000 square feet, with substantial portions of retail store space dedicating to showrooms, including samples of its products and more than 60 various bathroom, kitchens vignettes. Most of its revenue, around 53% of the total 2012 revenue, was from stone products. Ceramic products ranked second, accounting for 30% of the total sales while 17% of the total sales were setting and maintenance products.
What makes me interested is its consistently high same stores sales growth in the past three years. In 2012, its same store sales increased by as much as 7.1% with an operating margin of 18.8%. Its same store sales growth was much higher than its peers, including The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW). The Home Depot, Inc. (NYSE:HD) experienced an around 4.6% increase in its comparable store sales while Lowe’s had the lowest comparable sales growth, at only 1.4%. However, Tile Shop Hldgs, Inc. (NASDAQ:TTS) produced a loss of more than $46.8 million in 2012 compared to the consistent positive profit in the period of 2008-2011. The loss in 2012 was due to $82 million in the change in value of warrants.
… And most profitable with high insider ownership
According to those two Fool analysts, they were excited about Tile Shop because of its potential to increase its store base significantly, the high profitability and the company’s competitive advantage. In 2012, Tile Shop generated around $50.6 million in its adjusted EBITDA with an adjusted EBITDA margin of 27.7%. Tile Shop seems to be the most profitable with the highest adjusted EBITDA margin. While The Home Depot, Inc. (NYSE:HD) delivered only 12.6% in its adjusted EBITDA margin, the adjusted EBITDA margin of Lowe’s was the lowest of the three, at only 10.4%.
What makes me interested in this company are its high insider ownership and the potential to grow. Its president and CEO, Robert Rucker, owns more than a 19.8% stake in the company. All insiders combined have around a 37% stake in the company they are managing. In the past 12 years, Tile Shop has managed to grow its store count from 14 to 68, and it expects to double the number of stores to 130-140 in the next several years.
Tile Shop is trading at around $25.50 per share, with the total market cap of around $1.35 billion. The market values Tile Shop at as high as 27.6 times EV/EBITDA, much higher than the valuation of both The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW). The Home Depot, Inc. (NYSE:HD), at $75.10 per share, is worth around $109.7 billion on the market. It is valued much cheaper, at 12.35 times EV/EBITDA. Lowe’s is trading at $39.60 per share, with the total market cap of $43.1 billion. The market values Lowe’s Companies, Inc. (NYSE:LOW) the cheapest, at only 10.17 times EV/EBITDA.
My Foolish take
Income investors might favor The Home Depot, Inc. (NYSE:HD) with its decent dividend yield at 2%. While Lowe’s offers shareholders dividends with a lower yield at 1.5%, Tile Shop has not paid any dividends yet. Tile Shop, despite its high EV multiple, seems to be a good growth stock to invest in if investors would like to benefit from the housing boom, due to its rapid expansion plan, high comparable store sales growth, high adjusted EBITDA margin and high insider ownership.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Lowe’s, and Tile Shop Holdings. The Motley Fool owns shares of Tile Shop Holdings. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Highly Profitable and Fast Growing Home Improvement Retailer originally appeared on Fool.com is written by Anh HOANG.
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