Despite Housing Market Improvement, Investors Leaving Furniture Makers Behind

Includes: LZB, PHM, RYL, SPORQ
by: Alex Shadunsky

As the housing economic data has strengthened since the start of the year, stocks reliant on the housing market have seen an increase in investor interest. The big driver behind the run up has been Housing Starts, which have climbed from just above 40k a month to nearly 80k a month, close to a 4 year high. Homebuilders such as Standard Pacific (SPF), PulteGroup (PHM), Lennar (LEN), Toll Brothers (NYSE:TOL), and Ryland Group (RYL) have all risen between 55% and 99% year to date as earnings results and outlooks have shown significant improvements. The strength is being seen all across the housing sector.

Taking a look at two homebuilders that released results last week shows the strong fundamentals in the sector. Ryland's results released on Wednesday saw strong results: revenues rose 38.7% y/y, average sales price rose 3% y/y, gross margin increased 370 basis points y/y, new orders rose 42% y/y, and backlog rose 47% y/y.

Not to be outdone, PulteGroup's Q2 results showed similar strength as revenue from home sales rose 14% y/y, average sales price rose 8% y/y, gross margin increased 320 basis points y/y to 20.3%, new orders rose 32% y/y, and its backlog rose 31% y/y.

Despite the bullishness seen in the economic data and quarterly results, some housing-related stocks have seen little gains but should see a pickup in interest as the data continues to improve. One of those stocks is La-Z-Boy (LZB). The stock is down 2% year to date. The company now trades at a trailing EV/EBITDA ratio of just over 6 despite other similarly profitable furniture stocks trading in the high single digit range. For example, Leggett & Platt (LEG) is trading just below a 10 multiple and another furniture company, Ethan Allan (ETH), is trading at an EV/EBITDA multiple of just over 10.

Notably, LZB's results have been sluggish as Q4 revenue fell y/y and operating income was essentially flat. However, furniture companies generally see a lag in demand as before buying furniture for a new home, the home has to be built and occupied, and that times a little bit of time. In a recent article in Crain's, a Keybanc analyst says as much: "About six months after moving, homeowners buy furnishings to fill their residences."

Another stock missing out on all of the fun is Chromcraft Revington (CRC), a furniture retailer and manufacturer based out of Indiana. The stock has long traded for below book value as it has been unprofitable ever since the recession hit. However, at current valuations and improving results with the housing market as a strong tailwind, may give CRC a nice boost.

Recent results have improved as sales rose 11% in Q1 and gross margin nearly doubled to $2.9 million. The company still recorded a loss of 15 cents a share, but a significant improvement from the loss of 38 cents a share recorded in the first quarter of last year. With a strong asset base of about $21 million in current assets and the fact that it owns two large warehouses that have value on the open market, downside is limited here. If the company is able to continue seeing improvements in its results, a strong rally in the shares may follow. CRC is currently trading at an EV/revenue multiple of just 0.11. A move to ETH's multiple of 0.94 or just LZB's EV/revenue multiple of 0.37 would make the shares a triple.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.