2 Textile-Home Furnishing Stocks in Focus Amid Industry Challenges
Although COVID-induced supply chain disruptions, rising raw material costs, and higher transportation and labor expenses continue to build pressure on margins for companies in the Zacks Textile-Home Furnishing industry, sustained housing market momentum, efficient cost management, and persistent focus on product innovation have been driving the same. Companies like Mohawk Industries, Inc. MHK and Interface, Inc. TILE have been benefiting from strong end-market demand, acquisitions, and strategic initiatives to drive profitability.
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, vinyl flooring, medium-density fiberboards, luxury vinyl tiles, sheet vinyl products, hardwood flooring and vinyl flooring as well as roofing elements. They also provide knitted fabrics, jacquard woven fabrics, velvets, woven dobbies, piece-dyed woven products and polyurethane fabrics. 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.
3 Trends Shaping the Future of Textile-Home Furnishing Industry
Higher Demand From Repair & Remodeling Market: Strong demand stemming from an improved residential construction market is a major boon for industry participants. Meanwhile, work-from-home or stay-at-home orders amid the COVID-19 pandemic have encouraged consumers to take on more do-it-yourself and other home improvement projects. So, the industry stands to benefit from a solid rise in repair and remodeling activities.
Product Innovation & Acquisitions: The industry participants have been drumming up sales with product innovation and expanded distribution in a highly competitive market. Companies are trying to offset higher costs by raising prices, expanding in the growing channels, and foraying into new product categories and geographies. Furthermore, the players are pursuing acquisitions to broaden their product portfolio and expand their geographic footprint as well as market share.
Rising Costs, Tight Labor Market & Intense Competition: Although the demand trend has improved on the back of robust U.S. housing market fundamentals and repair & remodeling activities, the industry players have been bearing the brunt of the pandemic in the form of supply-chain disruptions. The companies have been experiencing rising raw material costs in many product categories.
The rising cost of raw materials and transportation 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 a concern.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Textile-Home Furnishing industry is a four-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #229, which places it in the bottom 10% 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 tepid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 tepid 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 bottom-line growth potential. Since February 2022, the industry’s earnings estimates for 2022 have been revised 12.8% downward.
Despite the industry’s dim near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags Sector & S&P 500
The Zacks Textile-Home Furnishing industry has lagged the broader Zacks Consumer Discretionary sector and Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively lost 38.3% versus the broader sector’s 25.2% decline. Meanwhile, the S&P 500 has climbed 5.8% in the same period.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the forward 12-month price to earnings, which is a commonly used multiple for valuing these stocks, the industry is currently trading at 7.36X versus the S&P 500’s 19.1X and the sector’s 21.36X.
Over the past five years, the industry has traded as high as 19.41X, as low as 6.74X and at a median of 11.04X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
2 Textile-Home Furnishing Stocks to Keep a Close Eye on
Below we have discussed two stocks from the industry that have solid growth potential. The chosen companies currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Interface: Headquartered in Atlanta, GA, this modular flooring company primarily operates in the Americas, Europe and Asia-Pacific. TILE has been gaining from rising orders, mainly driven by the growing demand in the Americas and parts of Europe as well as Asia-Pacific. It has been taking initiatives to reduce the cost structure, strengthen the balance sheet and improve cash flows that will help the company drive profits. As about 80% of the business involves renovation and remodel work, Interface is well positioned to benefit from sustained demand for remodeling activities. Also, rising demand for carbon neutral and carbon negative products is expected to drive Interface’s growth, as the company has been focusing on removing petroleum-based bitumen in favor of bio-based materials and recycled fillers.
Interface — a Zacks Rank #3 company — has gained 2.5% over the past year, outperforming the industry. Although the Zacks Consensus Estimate for its 2022 earnings has moved down over the past 60 days, the same moved 6.8% upward for 2023. Although earnings for 2022 are likely to reflect supply chain-related woes and higher raw material and labor costs, the same for 2023 is expected to grow 13.6%.
Price and Consensus: TILE
Mohawk Industries: This Calhoun, GA-based company is a leading flooring supplier for residential and commercial applications. A solid U.S. housing market and repair & remodeling activities have been benefiting Mohawk. Its dominant market share in the highly fragmented and competitive industry, acquisition strategy, and strong international presence are expected to drive growth. It has been streamlining operations, merging facilities and removing higher-cost assets to combat cost woes.
Mohawk stock has lost 38.1% over the past year. Although this Zacks Rank #3 company’s 2022 earnings are expected to register a decline, the same for 2023 will likely grow 14.7%.
Price and Consensus: MHK
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