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. The industry participants sell their products through a network of independently commissioned sales representatives, including distributors, retailers, wholesalers, specialty stores and home centers, in the United States and worldwide.
One of the prominent stocks in this industry is Mohawk Industries, Inc. (MHK).
Let’s take a look at the industry’s three major themes:
- The industry players have been bearing the brunt of the COVID-19 pandemic in the form of weak demand and supply chains disruptions. The scope and severity of this pandemic is quite different to the housing recession of 2008-2009, which is making it difficult for manufacturers to cope with.
- Also, rising cost of raw material and transportation, a stronger dollar, and a tight labor market are eating into profit margins. Significant investments in new products, distribution network and manufacturing facilities in a highly competitive landscape raise concerns. Moreover, the introduction of tariffs on Chinese imports by the Trump administration and retaliatory tariffs on exports spell trouble for the industry. This is because higher tariffs make sourcing difficult for home furnishing manufacturers, pushing up costs.
- On the positive side, the housing market rebound, on lower mortgage rates and reduced coronavirus-induced restrictions, is expected to provide a major boost to the industry participants in the near term. The recent decline in mortgage rates has been driving new home sales, which in turn would provide a modest spike in repair and remodeling activity in the near term. Additionally, 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 acquisitions to broaden their product portfolio and expand geographic footprint as well as market share.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Textile-Home Furnishing industry is a five-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #237, which places it in the bottom 6% 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 2020, the industry’s earnings estimates for 2020 and 2021 have gone down 37.1% and 17.1%, respectively.
Despite the industry’s dull near-term prospects, we will present a few stocks that one can buy or hold on to. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags Sector & S&P 500
The Zacks Textile-Home Furnishing industry has underperformed the broader Zacks Consumer Discretionary sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has lost 39.9% compared the broader sector’s 7.7% fall. Meanwhile, the Zacks S&P 500 composite has risen 6.1% during the period.
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 13.3X versus the S&P 500’s 22.6X and the sector’s 33.8X.
Over the past five years, the industry has traded as high as 19.41X, as low as 6.86X and at the median of 14.78X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Although improving housing market fundamentals, efficient cost management and continued focus on product innovation bring hope, weak demand stemming from COVID-19-led uncertainties along with supply chain disruptions will hinder industry players’ growth in the near term. Also, increased costs of raw material, transportation and labor continue to build pressure on margins.
Currently, there is no top-ranked stock in the Zacks universe of textile home furnishing sector that can stand tall amid the weak industry prospects. Nonetheless, investors may also hold on to the following stocks, which currently carry a Zacks Rank #3 (Hold) and have solid earnings prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Culp, Inc. (CULP): Headquartered in High Point, NC, the company manufactures, sources, markets and sells mattress fabrics and upholstery fabrics. The company’s current year and next-year earnings are expected to grow 66.7% and 79.1%, respectively.
Price and Consensus: CULP
Interface, Inc. (TILE): Headquartered in Atlanta, GA, Interface is the world's largest manufacturer of modular carpet. The stock has return on equity (ROE) of 31.5%, higher than the industry’s 5.6%.
Price and Consensus: TILE
Mohawk Industries: This Calhoun, GA-based company is a leading supplier of flooring for both residential and commercial applications. The company has a three-five year expected EPS growth rate of 10%.
Price and Consensus: MHK
Below is one stock with a bearish Zacks Rank that we would recommend investors to steer clear of for the time being.
Select Interior Concepts, Inc. (SIC): Headquartered in Anaheim, CA, this company installs and distributes interior building products for residential interior design services markets. The company’s earnings for 2020 are expected to decline 166.7%.
Price and Consensus: SIC
These Stocks Are Poised to Soar Past the Pandemic
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Interface, Inc. (TILE) : Free Stock Analysis Report
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