3 Textile-Home Furnishing Stocks to Escape Industry Challenges

Original post

Weak demand and supply chain disruptions stemming from COVID-19-led uncertainties are pressing concerns for the Zacks Textile-Home Furnishing industry. Also, increased costs of raw material, transportation and labor continue to build pressure on margins.

Nonetheless, improving housing market fundamentals, efficient cost management and continued focus on product innovation bring hope for companies like Mohawk Industries, Inc. (MHK), Culp, Inc. (CULP) and Select Interior Concepts, Inc. (SIC).

Industry Description

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.

4 Trends Shaping the Future of Textile-Home Furnishing Industry

Robust Housing & Repair & Remodeling Market: Solid momentum of the U.S. housing market, backed by rising need for more work-at-home space and record-low mortgage rates, is expected to be a major tailwind for industry participants. Precisely, strong demand stemming from an improved residential construction market is a major boon for industry participants. Meanwhile, the working from home or stay-at-home orders amid the COVID-19 pandemic have encouraged consumers to take on more do-it-yourself or DIY projects and other home improvement projects. So, the industry stands to benefit from the strong rise in repair and remodeling activity.

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 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.

COVID-19 Impact: 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 weak demand and supply chains disruptions. Also, risks to the consumer spending outlook from any renewed intensification in social distancing are pressing concerns. Notably, the United States is facing another major wave of coronavirus cases.

Rising Costs, Tight Labor Market & Intense Competition: 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.

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 #131, which places it in the bottom 48% 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.

Despite the industry’s gloomy near-term view, we will present a few stocks that one may consider for the 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 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 10.7% against the broader sector’s 9% rise. Meanwhile, the Zacks S&P 500 composite has risen 16.7% 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 11.2X versus the S&P 500’s 22.8X and the sector’s 33.7X.

Over the past five years, the industry has traded as high as 19.4X, as low as 6.9X and at the median of 13.9X, as the chart below shows.

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

 

3 Textile-Home Furnishing Stocks to Keep a Close Eye on

Mohawk Industries: This Calhoun, GA-based company is a leading supplier of flooring for both residential and commercial applications. 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.

Although COVID-19 related woes are expected to impact 2020 EPS growth rate, its earnings are expected to grow 24.1% for 2021. This Zacks Rank #2 (Buy) company has gained 56.6% in the past six months, outperforming the industry’s 55% rise. Mohawk has seen upward estimate revision for its respective 2020 and 2021 bottom line over the past 30 days of 25.4% and 13.3%, depicting analysts’ optimism over the stock’s earnings prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: MHK

 

Culp: Headquartered in High Point, NC, the company manufactures, sources, markets and sells mattress fabrics and upholstery fabrics. Both its Mattress Fabrics and Upholstery Fabrics segments have been witnessing increase in orders and shipments. It has been investing in additional equipment to expand capacity in North America. Strength and flexibility of its global manufacturing and sourcing operations in the United States, Canada, Haiti, Asia, and Turkey will strengthen its position to execute strategies and support the current environment surrounding the changing demands of customers.

This Zacks Rank #3 (Hold) company’s earnings for the current year are expected to reflect the COVID-19 related woes. That said, its earnings are expected to grow 250% next year. The company has gained 158.4% in the past six months.

Price and Consensus: CULP

Select Interior Concepts: Headquartered in Anaheim, CA, this company installs and distributes interior building products for residential interior design services markets. It has been gaining strength from strong demand in its key end-markets despite uncertainty created by the COVID-19 pandemic. Also, the company’s initiatives to drive incremental EBITDA from untapped potential within its existing footprint are encouraging.  Most importantly, it has been looking into opportunities in strategic sourcing, organizational design and productivity, insurance programs, and facility footprint optimization that will drive long-term growth.

This Zacks Rank #3 company has gained 227.7% over the past six months. The Zacks Consensus Estimate for its 2020 loss has narrowed to 19 cents from 20 cents per share over the past 30 days. Although its bottom line for 2020 is expected to decline 170.4%, the same for 2021 is expected to grow 279%.

Price and Consensus: SIC

 

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Select Interior Concepts, Inc. (SIC): Free Stock Analysis Report
 
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Culp, Inc. (CULP): Free Stock Analysis Report
 
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