Hooker Furniture: Record Results And Backlog, Earnings Beat Equals High Upside

Summary

  • We see Hooker Furniture having 60% total return potential [on top of the 82% return so far since we initiated coverage].
  • Strong order growth leading to record high backlog +206% YoY, equal to 2 months' worth of sales.
  • $7.30 per share net cash, or 18% of the stock price.
  • All business segments saw YoY increases in their top line.
  • Housing market is strong with legs till FY23, with markets witnessing biddings war and demand outstripping supply.
Luxurious and modern living room 3D rendering
alvarez/E+ via Getty Images

Hooker (NASDAQ:HOFT) reported very strong, and above-expectations results for the fiscal first quarter results ended April. Their revenue increased 56% YoY, and EPS was $0.76 per diluted share. EPS was well ahead of consensus expectations of $0.48 [one analyst]. Both the quarterly revenues and EPS represent record-high sales and earnings for the company’s fiscal first quarter. Management commentary regarding the outlook was quite positive, and they continue to see strong orders after the quarter end. The backlog is at a record high, and is up +206% YoY and +13% sequentially. The backlog is high in absolute terms, at $281 million, which is equal to around 2 months’ worth of sales, giving the company a lot of business visibility.

Source: 10-Q

In terms of operating segments, the Hooker Branded Segment led the way with an 89% sales increase compared to a year ago, while the Home Meridian and Domestic Upholstery segments both reported 46% sales increases versus the prior year period. The revenues were the highest ever for the fiscal first quarter, which can be seen in the following table:

Source: Bloomberg Terminal

Raising Target Price to $63, Total Return of 60%

Historically, over the past seven years, Hooker's stock has traded at 16-18x forward P/E. In looking at historical data, we are focused on the “normalized” period before the China-USA trade war period, and the Covid disruptions in early 2020. Also, overall large-cap and small-cap multiples have also expanded over the past many years. Using a P/E of 16 times on $3.50 in EPS [after deducting out interest income after-tax], we get a price of $56.00. To this figure, we will add back $7.30 in present net cash, to arrive at a target price of $63.00. We need to add back net cash to our P/E-derived price target, as in today’s unusually low interest rate environment, HOFT's large net cash position is not being reflected on the income statement, as interest income is virtually zero.

It is interesting to note that Hooker’s stock is still trading at nearly a 20% discount to prior 5-year highs of $49, whereas other competitors such as Haverty Furniture’s (NYSE:HVT) stock is up over 100% from its prior 5-year high. Most housing and furniture stocks have handily surpassed prior highs, which suggests to us that Hooker’s stock still has a lot of upside.

Valuations

At today's stock price, the valuations are more than a 50% discount to the overall market. Hooker's stock price, minus the large net cash position [effectively the Enterprise Value], is $33, which suggests a P/E of less than 10x times based on our forward $3.50 estimate. This is just too cheap for a secular growth company that is in the midst of a boom in demand for their products.

On our price target, we value Hooker with an ex-cash P/E of 16.0x and an FCF Yield on EV of 6% [minus interest expense of $0.05 per share] on a normalized FY01/2022e. If you decide not to go with ex-cash P/E method, on a FY01/2022e a normal P/E is 18x [we have arrived at this by dividing our price target of $54.20 by an EPS of $3.40].

We see the stock increasing going forward on the back of a still robust housing market that has legs going through FY2022 and even FY2023. The stock has already gone up 82% since our initial recommendation in late August, and we were very right on the view that furniture will be a huge benefactor in this attractive macro-environment. Despite rising costs and mortgage rates, homes are still getting snatched off the market at a record pace, per a new Redfin report. On this positive data point and more [see housing industry analysis section], we think that this is a sure-fire sign that Hooker will be a direct beneficiary and will see robust furniture top-line this FY01/2022.

Hooker: Secular Growth

Hooker is a secular growth company, having witnessed rapid growth in the last decade. The growth has been in both revenues and bottom-line EPS. The only disruption to this decade-long growth occurred during fiscal year 2020 and 2021 due to the USA-China trade war and the Covid shutdown. We believe both these issues are now well behind the company.

Source: Bloomberg Terminal

Source: Bloomberg Terminal

Business Improvements by Segment - Q1FY2022

Source: 10Q

Despite there being some logistical challenges that impacted their Hooker Branded and Home Meridian segments and some raw material shortages affecting their Domestic Upholstery segment, consolidated net sales increased by 55.7% or $58.3 million. This showcased the company’s ability to significantly grow its top-line. The Hooker Branded segment’s net sales increased by $24.2 million or 89% versus the prior year period as incoming orders nearly doubled and finished the quarter with a backlog that more than tripled versus the prior year first quarter end.

The Home Meridian segment’s net sales increased by $26.7 million or 46.4% in the fiscal 2022 first quarter versus the fiscal 2021 first quarter due to increased sales with major furniture chains and retail stores driven by increased demand and incoming orders.

Housing Boom: Prices, Mortgage Rates, Supply and Biden

Despite rising costs and mortgage rates, homes are still getting snatched off the market at a record pace, per a new Redfin report. About 59% of homes that went under contract had an accepted offer within two weeks of hitting the market, while more than 40% of homes sold above the original asking price. Mortgage rates rising are fueling more sales, rather than dissuading buyers: The recent decline in the US benchmark 10 year Treasury bill to below 1.5%, despite high inflation data, is very encouraging and positive for housing stocks and mortgage rates.

Source: CNBC

“The uptick in mortgage rates is likely fueling more bidding wars in the short term because house hunters are rushing to buy homes before rates rise even further,” said Redfin chief economist Daryl Fairweather

Economists also forecast sales to rise again this year, while there are fewer systemic risks, and the market is critically undersupplied. New construction hasn't kept up with household demand, and buyers are competing fiercely for a limited number of homes.

"Looking ahead, Biden's infrastructure plan aims to incentivize zoning for multi-family homes, which could increase the supply of affordable homes and provide even more people a path to homeownership," said Redfin chief economist Daryl Fairweather.

Conclusion

Hooker had a record April quarter to start FY01/2022. They had strong earnings and top line in all of their business segments. The company had a very strong backlog as well. Hooker is a secular growth company and has had pronounced earnings growth over the past decade. This growth should continue going forward, as the company is a direct beneficiary of the housing boom that is still going strong. We see a strong runway of growth ahead for this housing market well into the next calendar year, and this should directly have benefits for the furniture industry.

This article was written by

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Value Investment Principals [VIP] has a 12-year track record, starting in 2009, focusing on unique under-covered stocks. Our typical ideas have zero/limited research coverage, “deep-value”, growth, high cash and FCF [Free Cash Flow]. We search for High Dividend Yields to appeal to retail clients, creating a steady source of income. We have a strong track record of performance for both large institutional and High Net-Worth Individuals [HNIs].


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He has an MBA degree [Director’s List Honors] from the Wharton School, and a Master of International Management [with Honors] from the American Graduate School of International Management. He attained his CFA at the age of 25.

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Disclosure: I am/we are long HOFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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