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Bull of the Day: Restoration Hardware (RH)

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Stocks were battered last week, but if there’s any hope for a “Santa rally,” it will likely come on the back of trade war progress paired with renewed optimism about the consumer economy. If that happens, look for companies that have recently posted beat-and-raise quarters on the back of strong business trends.

One such example is Restoration Hardware (RH - Free Report) . The Zacks Rank #1 (Strong Buy) home furnishings retailer last week posted earnings of $1.73 per share, topping the Zacks Consensus Estimate of $1.27 and growing 66% from the year-ago period. This performance also surpassed RH’s own guidance range of $1.15 to $1.33 per share.

Adjusted revenue in the quarter totaled $638.5 million, which marked year-over-year growth of 8% and beat estimates of $633 million. RH’s comparable brand sales (comps) were up 4% from the prior year, which is especially impressive given that the comparable quarter saw comps growth of 6%.

So what contributed to the strong performance, and can investors expect the trend to continue? Well, let’s take it from management themselves.

“While the luxury housing market has sequentially slowed throughout 2018, our revenues have sequentially accelerated, despite cycling inventory reduction efforts and managing the business with a bias for earnings versus revenue growth, clearly demonstrating our ability to gain market share,” the company said in its release.

And in terms of outlook, management raised its Q4 revenue guidance to range of $680 million to $690 million, up from previous guidance of $665 million to $685 million. Earnings guidance for the period was raised to $2.75 to $2.90 per share, a major increase from prior expectations of $2.33 to $2.54 per share.

RH also maintained its fiscal year 2019 revenue guidance of $2.72 billion to $2.82 billion. This would represent growth of 8% to 12%. Moreover, management said it will not see a material impact from Chinese tariffs.

Shares of RH added about 11% in the day after its report, but the stock pulled back during Friday’s selloff. Investors simply did not want to hold on to stocks with fresh momentum over the weekend, as another volatile week of trading likely inspired whatever profit taking was possible.

That said, RH is now trading at an incredibly attractive valuation. By late afternoon hours, the stock was at about 16.2x the midpoint of its full-year EPS guidance range. This pairs well with its PEG ratio of 0.8, which is a discount to the industry’s average of 1.0 and implies investors are getting a great price for the company’s earnings growth outlook.

That’s a brief look at the near-term value and growth outlook, but one should also note that analysts have given RH a long-term projected EPS growth rate of 21.9%.

This is a very simple thesis, really. The overall price action in stocks right now looks relatively bearish. But with the Fed turning slightly dovish, we’ve shortened our list of major headwinds down slightly, and investors will be ready to rip higher if progress is made on the trade war.

RH protects you from the worst of the trade war blues by not being materially affected by it, plus it has the perfect combination of value, growth, and earnings fundamentals that investors will pile into as the outlook for the broader market improves.

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