Four Home Furnishing Stocks for a Housing Recovery

Recent economic data regarding new home starts, mortgage applications, and a variety of other data is beginning to show that the bottom in housing is here, or at least very close. This was all preceded by the enormous call buying in the Homebuilders ETF (XHB), which I highlighted various times on my website.

While many will say to start buying the homebuilder stocks, there still is a lot of risk there as much of the data is positive due to re-financing, and over-supply is still an issue. However, the home furnishing stocks are at record low valuations here, have bullish technical charts, and are seeing some bullish bets being placed in the options market. As housing prices begin to recover, many homeowners will look to refinance and use the extra savings to invest in home improvement projects and furnishing.

The home furnishing stocks are undervalued, and are short squeezes waiting to happen.

A quick overview of the names worth an investment in the group:

Leggett & Platt (LEG): With a market cap of just over $2 billion, Leggett & Platt is the largest player in the group, and provides a range of products to the home including bedding and wire fixtures. Shares are near a major breakout level at $13.65, and with 11.7% of the float short, there could be a minor squeeze. There also was bullish buying of the April $15 calls earlier today. Shares currently trade just 0.5X sales and 1.25X book value, while recently affirming its 7.65% dividend yield. Furthermore, CEO David Haffner was actively buying shares in early March from a price range of $10.30 to $12.40, and accumulated more than 70,000 shares in Feb and March.

Acuity Brands (AYI): Acuity designs and produces lighting fixtures for homes and commercial applications. Shares are currently trading just 7x trailing earnings, 0.47x sales, and 1.65x book value while also finding channel support on the chart. Profitability margins remain strong, and AYI is well positioned for a push in home improvement projects.

Ethan Allen Interiors (ETH): Ethan Allen produces furniture for all types of uses including beds, dressers, tables, clocks, rugs, and everything else associated with the home. ETH was a $30 stock back in October and is now at $11.29, trading 0.34x sales, 9x trailing earnings, and 0.79x book value. With 25% of the float short, ETH could see a massive short squeeze.

Tempur Pedic (TPX): Tempur Pedic is a producer of bedding products and is the most speculative play in the group. Shares trade only 9x trailing earnings, 0.57x sales, but there are debt concerns. More than 18% of the float is short, with 13 days to cover, and TPX has had a flurry of insider buying lately. The shares have major resistance at $8, but a move through that level could send shares on a 50% climb to $12.

Disclosure: no positions

Comments

[Chris B:]

1) Furniture/fixture manufacturing and sales is rather capital intensive. Those trailing earnings PE's could quickly turn negative on even small revenue dips if margins are low enough. There are lots of other industires with single-digit PE's and better opportunities for gain in the future.

2) These companies represent the high-end luxury range of the market. Yet, I'd say the household consumption binge of the early 2000's is over. The consumer savings rate will revert to 10%, already at 3%, up from 0%. Those $2000 designer chairs, $200 light fixtures, and $1200 mattresses will be the first thing gone from the budgets of shell-shocked consumers who are more focused on paying down record debt levels than adding new debt. To the extent new furnishings/fixtures are necessary, consumers will look to cheap Chinese stuff.

3) We're coming out of the biggest housing and debt binge in history, and I'd say the market is oversupplied with relatively new furnishings. Foreclosure and downsizing trends are inflating the used market. Many of the brimming self-storage facilities are now offering garage sales to their customers.

4) Unemployed people don't buy luxury household items. The economy will turn around long before the unemployment rate improves, and perhaps even as unemployment gets worse. This means that lots of other industries will experience earnings gains long before household luxury items.

5) Demographic graying and the depletion of retirement savings means that the glut of household furnishings and fixtures will be in use for a long time rather than being replaced. Demand will not reach 2006 levels for years.

Mar 26 03:06 PM

[mac.barron:]

Chris B has done an excellent job of splashing cold reality on the notion that any of these stocks has real legs. Sure, a trader might get luck on a few quick buy-and-dump plays, but there isn't much here other than a pending ride down IMO.

Mar 26 06:23 PM

[Joe Kunkle:]

1) Those trailing P/E's won't turn negative, as the earnings already happened and we are looking at the present, unless you theorize a negative price....the operating margins are 7 to 12% on these stocks

2) Consumers have been saving at a record pace and add in re-financing debt that saves thousands of dollars and plenty of capital is available to invest in high end furniture, because the more dollars you put in the more you get out, a simple notion in real estate valuation

3) Markets are forward looking, and that housing and debt binge is in the fast, and the valuation disconnect will be realized by the institutions looking for a longer term stability investment

4) I would not say furniture is exactly a luxury, more of a necessity, and unemployment is very close to a bottom, with 10% being the worst we could see

5) Not a real sensible argument, that consumers will not buy household items because of retirement savings dwindling...most new home buyers and people upgrading houses are in 30's to 40's have have a 20 year time horizon or more remaining for retirement savings, not a real worry

Mar 27 02:10 PM

[LCM:]

As someone who worked for Ethan Allen, I wouldn't touch their stock at ANY price....the companies agenda is seriously flawed, especially with the move away from "overpriced" furniture made in China, which is where a great deal of their product is now made. The CEO's assertion, that people will buy their products because of the socalled "design" service is ridiculous....

Mar 30 11:45 AM

[Rico44:]

Joe;
I don't want to quibble over the small stuff, but thought I'd comment on point # 2 in your rebuttal to Chris B. You state, "because the more dollars you put in the more you get out, a simple notion in real estate valuation". This may have been the old notion in real estate, but lately it has been 'the more you put in, the more you lose/have lost'. I'm not sure any of the old 'notions' are valid anymore...

Aug 08 11:07 AM