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Bleak Near-Term Outlook for Textile-Home Furnishing Stocks

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The Zacks Textile-Home Furnishing industry comprises manufacturers, designers, distributors and marketers of flooring, carpet and upholstery products. The products include carpets, rugs, ceramic tile, laminate, wood, stone and vinyl flooring in the United States and worldwide. The industry participants sell their products through a network of independently commissioned sales representatives, including distributors, retailers, wholesalers, specialty stores and home centers.

One of the prominent stocks in this industry is Mohawk Industries, Inc. (MHK - Free Report) .

Let’s take a look at the industry’s three major themes:

  • The industry participants are registering higher demand courtesy of an increase in disposable income, a lower unemployment rate and improving consumer confidence. Higher construction spending activity has turned out to be a boon for the Textile-Home Furnishing industry, boosting companies’ revenues and profits. Also, the recent decline in mortgage rates should benefit existing home sales, which in turn would provide a modest bump to repair and remodeling activity in the near term.
     
  • The industry participants have been drumming up sales with product innovation and expanded distribution in a highly competitive market. The companies are trying hard to offset higher costs by raising prices, expanding in growing channels, and foraying into new product categories and geographies. Moreover, the players are pursuing accretive acquisitions to broaden their product portfolio and expand geographic footprint as well as market share.
     
  • On the flip side, rising raw material costs, higher transportation costs, a stronger dollar and a tight labor market are hurting profit margins. Significant investments in new products, distribution network and manufacturing facilities in a highly competitive landscape raise concerns. Moreover, the entire industry space has been reeling under trade-war fears after the introduction of tariffs on Chinese imports by the Trump administration. The threat of tariffs on imports and retaliatory tariffs on exports spell trouble for the industry. Higher tariffs make sourcing difficult for home furnishing manufacturers, pushing up costs.

Zacks Industry Rank Indicates Bearish Outlook

The Zacks Textile-Home Furnishing industry is a six-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #233, which places it in the bottom 8% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since April 2019, the industry’s earnings estimates for 2019 and 2020 have gone down by 8.1% and 8.7%, respectively.

Despite bleak near-term prospects of the industry, we will present a few home furnishing stocks that one can retain given their prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Outperforms Sector & S&P 500

The Zacks Textile-Home Furnishing industry has outperformed the broader Zacks Consumer Discretionary sector as well as the Zacks S&P 500 composite over the past year.

The industry has gained 12.5% over this period compared with the broader sector’s increase of 5.8%. The S&P 500 has risen 11.3% in the said time frame.

One-Year Price Performance


 
 
Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing these stocks, the industry is currently trading at 12.14X versus the S&P 500’s 17.46X and the sector’s 18.59X.

Over the past five years, the industry has traded as high as 19.41X, as low as 9.03X and at the median of 15.58X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

 

Bottom Line

A boost in construction spending appears conducive to the industry’s growth. Also, improving housing market fundamentals, efficient cost management and continued focus on product innovation are expected to drive growth. However, the industry has been grappling with increased expenses. Margins remain stressed as raw material, transportation and labor costs continue to rise.

None of the stocks in the Zacks Textile-Home Furnishing space currently carries a Zacks Rank #1 (Strong Buy) or Zacks #2 (Buy). So, investors might prefer holding on to the following stocks, which currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Mohawk Industries, Inc.: This Calhoun, GA based company is a leading supplier of flooring for both residential and commercial applications. The stock has return on equity (ROE) of 9.8%, higher than the industry’s 6.7%.

Price and Consensus: MHK



Interface, Inc. (TILE - Free Report) : Headquartered in Atlanta, GA, Interface is the world's largest manufacturer of modular carpet. The company’s earnings for 2020 are expected to grow 11.5%.

Price and Consensus: TILE



Crown Crafts, Inc. (CRWS - Free Report) : Headquartered in Gonzales, LA, this company operates in the consumer products industry in the United States and internationally. The stock has return on equity (ROE) of 13.5%, higher than the industry’s 6.7%.

Price and Consensus: CRWS




Below are two stocks with a bearish Zacks Rank that we would recommend investors to stay away from for the time being.

Select Interior Concepts, Inc. (SIC - Free Report) : Headquartered in Anaheim, CA, this company installs and distributes interior building products for residential interior design services markets. The stock carries a Zacks Rank #4 (Sell) and the Zacks Consensus Estimate for 2019 EPS has fallen 2.5% over the past 30 days.

Price and Consensus: SIC




Culp, Inc. (CULP - Free Report) : Headquartered in High Point, NC, the company manufactures, sources, markets and sells mattress fabrics and upholstery fabrics. The stock carries a Zacks Rank #4 and the Zacks Consensus Estimate for 2019 EPS has fallen 18.4% over the past 60 days.

Price and Consensus: CULP



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