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As individuals consistently prioritize investing resources to enhance their homes, the demand for home renovations and remodeling services will likely remain stable. Given the backdrop, investors could consider buying the shares of three fundamentally sound home improvement companies: The Home Depot, Inc. (HD), Flexsteel Industries, Inc. (FLXS), and Tile Shop Holdings, Inc. (TTSH).
Even though inflation has witnessed a significant drop from its peak last year, it continues to surpass the Federal Reserve’s 2% target. This indicates the likelihood of further interest rate hikes in the future to address this ongoing concern.
Given the persisting inflation and further possibility of interest rate hikes, consumers are increasingly focused on staying in their existing homes and directing their investments toward repairs, renovations, and improvements that align with their lifestyles and requirements.
The worldwide home improvement services market is anticipated to expand, rising from $324.80 billion in 2022 to around $343.80 billion in 2023, demonstrating a CAGR surpassing 5%. Additionally, market projections indicate that it is poised to hit $423.90 billion by the year 2027.
Moreover, the surge in the adoption of cutting-edge smart home technologies like the Internet of Things (IoT) and Artificial Intelligence (AI) is fueling an elevated demand for home improvement services. The increasing desire for smart homes, coupled with heightened concerns regarding security, are expected to contribute significantly to the expansion of the global home improvement market.
Furthermore, the enduring appeal of Do-It-Yourself (DIY) home improvement solutions, attributed to their cost-saving advantages in terms of labor, is anticipated to provide significant momentum to the market’s progress.
The global market for DIY home improvement retailing is set to witness a stable growth trajectory, exhibiting a CAGR of 4.4%, resulting in a revenue of approximately $1.28 trillion between 2022 and 2030.
In light of such encouraging trends, let us dive deeper into the fundamentals of the B-rated Home Improvement & Goods industry’s picks, starting with number three.
Stock #3: The Home Depot, Inc. (HD)
HD operates as a home improvement retailer. The company sells various building materials, home improvement products, lawn and garden products, and décor products, as well as facilities maintenance, repair, and operations products.
On August 23, HD launched a New Homeowners Hub, designed to provide essential resources such as DIY guides, product suggestions, design inspiration, and more to empower the upcoming generation of existing and prospective first-time homeowners.
Commenting on this, Molly Battin, senior vice president and chief marketing officer at HD, said: “Helping homeowners complete projects is part of our DNA, so it was a natural move to create an online resource designed to empower our customers with everything they need to confidently turn their first house into a home.”
On August 17, HD declared a quarterly cash dividend of $2.09 per share, payable to its shareholders on September 14, 2023. This marks the company’s 146th consecutive quarterly dividend.
HD’s annual dividend of $8.36 translates to a 2.53% yield on the prevailing prices, while its four-year average dividend yield is 2.27%. Its dividend payouts have grown at CAGRs of 11.7% and 15.5% over the past three and five years, respectively. Also, it has a record of 13 years of consecutive dividend growth.
The stock’s trailing-12-month net income margin of 10.48% is 137.4% higher than the 4.42% industry average. Its trailing-12-month ROTC of 29.10% is 385.8% higher than the 5.99% industry average. Furthermore, HD’s trailing-12-month asset turnover ratio of 2.04x is 104.9% higher than the industry average of 0.99x.
For the fiscal second quarter, which ended on July 30, 2023, HD’s net sales amounted to $42.92 billion, while its gross profit came in at $14.16 billion. In addition, during the same period, the company’s net earnings and EPS stood at $4.66 billion and $4.66, respectively. Also, its cash and cash equivalents amounted to $2.81 billion, up 2.2% compared to $2.76 billion as of January 29, 2023.
Street expects HD’s revenue and EPS for the third quarter (ending October 2023) to be $37.83 billion and $3.79, respectively. Its EPS is expected to improve by 1.1% per annum over the next five years. Moreover, the company has an excellent earnings surprise history, surpassing its EPS estimates in each of the trailing four quarters.
HD’s shares have gained 12.9% over the past three months to close the last trading session at $330.30.
HD’s POWR Ratings reflect this robust outlook. It has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Stability, Sentiment, and Quality. Among the 58 stocks in the B-rated Home Improvement & Goods industry, it is ranked #19. To see additional POWR Ratings for Growth, Value, and Momentum of HD, click here.
Stock #2: Flexsteel Industries, Inc. (FLXS)
FLXS operates as a manufacturer, importer, and online marketer of upholstered furniture for residential and contract markets in the United States. It provides upholstered furniture, such as sofas, convertible bedding units, chairs, reclining and rocker-reclining chairs, swivel rockers, sofa beds, etc.
On July 10, FLXS paid its shareholders a quarterly dividend of $0.15 per share, which marks its 326th uninterrupted quarterly dividend. FLXS’ annual dividend of $0.60 translates to a 2.69% yield on the prevailing prices, while its four-year average dividend yield is 3.39%.
The stock’s trailing-12-month ROTA of 5.09% is 32.1% higher than the 3.85% industry average. Furthermore, its trailing-12-month asset turnover ratio of 1.41x is 41.7% higher than the industry average of 0.99x.
For the fourth quarter of 2023, which ended on June 30, 2023, FLXS’ net sales amounted to $105.82 million, while its gross margin rose 19.5% from the year-ago value to $21.12 million. Its operating income came in at $4.24 million, up 18.8% year-over-year.
Moreover, the company’s net income and EPS amounted to $10.16 million and $1.91 versus a net loss and loss per share of $271 thousand and $0.05 in the same period last year, respectively.
The consensus revenue estimate of $96.33 million for the first quarter of fiscal 2024 (ending September 2023) represents a marginal increase year-over-year. The consensus EPS estimate of $0.25 for the current quarter indicates a 177.8% improvement year-over-year.
Additionally, the company surpassed the revenue and EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 53.7% over the past nine months to close the last trading session at $22.60.
FLXS’ strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to Buy in our proprietary rating system.
It also has an A grade for Growth and Value and a B for Momentum. Within the same B-rated industry, it is ranked #4. Click here to see the other ratings of FLXS for Stability, Sentiment, and Quality.
Stock #1: Tile Shop Holdings, Inc. (TTSH)
TTSH operates as a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States. Its offerings include natural stone products, such as marble, travertine, granite, quartz, sandstone, slate, onyx tiles, etc.
On June 26, TTSH inaugurated its fifth store in the Colorado market, elevating its presence to a total of 143 retail showrooms spanning the United States. The new retail showroom spans approximately 10,000 square feet, delivering homeowners and trade professionals an unparalleled design experience.
It boasts an expansive variety of tiles. The selection caters to a diverse range of projects, spanning from DIY backsplashes to extensive renovations.
TTSH’s trailing-12-month gross profit margin of 64.88% is 83.7% higher than the 35.32% industry average. Also, the stock’s trailing-12-month CAPEX/Sales of 3.83% is 20.3% higher than the industry average of 3.18%. Additionally, its trailing-12-month asset turnover ratio of 1.15x is 15.6% higher than the industry average of 0.99x.
For the second quarter, which ended on June 30, 2023, TTSH’s net sales amounted to $98.56 million, while its adjusted EBITDA came in at $13.58 million.
In the same period, the company’s net income stood at $5.08 million and $0.12 per share, respectively. In addition, its cash and cash equivalents came in at $14.59 million, increasing 145.3% compared to $5.95 million as of December 31, 2022.
Analysts expect TTSH’s revenue and EPS for the fiscal third quarter (ending September 2023) to be $96.77 million and $0.05, respectively. In addition, its EPS is expected to improve by 20% per annum over the next five years. Moreover, the company topped the EPS estimates in three of the trailing four quarters, which is promising.
Over the past year, the stock has gained 51% to close the last trading session at $5.92.
It’s no surprise that TTSH has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. It has an A grade for Sentiment and Quality and a B for Value. Out of 58 stocks in the same industry, it is ranked first.
In addition to the POWR Ratings we’ve stated above, we also have TTSH ratings for Growth, Momentum, and Stability. Get all TTSH ratings here.
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HD shares were trading at $332.36 per share on Friday afternoon, up $2.06 (+0.62%). Year-to-date, HD has gained 7.43%, versus a 18.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka’s ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run. More…