Which Stock Is Up 21% Year-To-Date And Has Increased Its Dividend By 6.5%?

Jul.21.14 | About: Williams-Sonoma Inc. (WSM)

Summary

If you guessed Williams-Sonoma, you are correct!

The stock was upgraded recently by Nomura, but I believe there are high expectations for this quarter.

I believe the stock to be fairly valued at this price level.

The last time I wrote about Williams-Sonoma Inc. (NYSE:WSM) I stated, "I'm going to actually pull the trigger on this particular name in the face of this market pullback." Since writing the article, the stock has popped 32.23% (it even got up to a 38% gain) versus the 11.48% gain the S&P 500 (NYSEARCA:SPY) posted. Williams-Sonoma is a specialty retailer of products for the home, operating stores under the name of Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation.

On May 21, 2014, the company reported first quarter earnings of $0.48 per share, which beat analysts' estimates by $0.04. In the past year, the company's stock is up 20.22% excluding dividends (up 22.42% including dividends) and is beating the S&P 500, which has gained 16.89% in the same time frame. Since initiating my position back on May 21, 2013, I'm up 25.04% inclusive of reinvested dividends and dollar cost averaging. With all this in mind, I'd like to take a moment to evaluate the stock to see if right now is a good time to purchase more for the services sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 23.97, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 19.31 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.81), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 13.21%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 13.21%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 13.81%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

21Oct13

53

19.56

16.59

3.19

47

1.43

13.66

20Nov13

55.51

20.48

17.43

3.18

47

1.52

13.51

29Jan14

52.93

18.84

16.52

3.20

48

1.45

13.02

19Jul14

69.99

23.97

19.31

3.62

54

1.81

13.21

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Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 1.89% with a payout ratio of 45% of trailing 12-month earnings while sporting return on assets, equity and investment values of 12.9%, 23.5% and 22.1%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 1.89% yield of this company alone is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 9 years at a 5-year dividend growth rate of 19.3%. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

21Oct13

2.34

46

12.9

21.6

19.5

20Nov13

2.23

46

12.9

21.6

19.5

29Jan14

2.34

44

13

22.4

19.5

19Jul14

1.89

45

12.9

23.5

22.1

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Technicals

Click to enlarge

Looking first at the relative strength index chart [RSI] at the top, I see the stock muddling around in middle-ground territory with upward trajectory and a current value of 48.35. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars flattening in height. As for the stock price itself ($69.99), I'm looking at the 20-day simple moving average (currently $71.31) to act as resistance and the 50-day simple moving average (currently $68.51) to act as support for a risk/reward ratio, which plays out to be -2.11% to 1.89%.

Is It Time To Jump Off The Wagon?

Nomura recently started covering the stock and initiated it with a "buy" rating. The analyst thinks that Williams-Sonoma's high e-commerce accountability of the business supports revenue growth in addition to profits. The price target set on the stock is $85, which would be a 21% increase from today's price. I on the other hand am beginning to believe that the stock has run up quite a bit this year and is priced for perfection. I believe that the stock may get hammered the next time it reports (towards the end of August is the anticipated date) if it misses on earnings. I believe the consumer may not be spending as much these days on their homes as they were in the past year. Though the jobless claims are decreasing and employment is increasing of late, there are lots of companies doing mergers and acquisitions which is causing employees to be cautious with their spending. If the consumer is indeed going to keep a closer eye on their wallet, I believe Williams-Sonoma may be in the cross hairs of revenues decreasing.

Conclusion

I haven't liked the housing retailers of late a la Home Depot (NYSE:HD) and Lumber Liquidators (NYSE:LL), as the former has done nothing in the past year, and the latter has absolutely plummeted in the past few months. Lumber Liquidators is saying that people are just postponing their floor remodeling these days. If this was not true, you would see Home Depot having increased sales (but I'm not seeing that). But if it is true, then maybe it is a sign that the consumer is getting stretched thin here. Fundamentally, I believe the stock to be fairly valued on next year's earnings estimates and on earnings growth expectations while sporting excellent near- and long-term earnings growth expectations. Financially, the dividend is pretty small but has room to grow in the future. On a technical basis the stock seems to be starting some bullish momentum but I don't like the risk/reward ratio right now. I like the stock and will buy a small batch this week (15% less than I normally would) just for a piece of the dividend.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: The author is long WSM, HD, LL, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.