Are Robust Financials Driving The Recent Rally In Floor & Decor Holdings, Inc.’s (NYSE:FND) Stock?

Most readers would already be aware that Floor & Decor Holdings’ (NYSE:FND) stock increased significantly by 30% over the past three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Floor & Decor Holdings’ ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Floor & Decor Holdings

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Floor & Decor Holdings is:

17% = US$145m ÷ US$850m (Based on the trailing twelve months to June 2020).

The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.17 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Floor & Decor Holdings’ Earnings Growth And 17% ROE

At first glance, Floor & Decor Holdings seems to have a decent ROE. Further, the company’s ROE is similar to the industry average of 15%. Consequently, this likely laid the ground for the impressive net income growth of 31% seen over the past five years by Floor & Decor Holdings. We reckon that there could also be other factors at play here. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Floor & Decor Holdings’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 5.9%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Floor & Decor Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Floor & Decor Holdings Using Its Retained Earnings

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Engineers Gate Manager LP Purchases 30,772 Shares of Floor & Decor Holdings Inc (NYSE:FND)

Engineers Gate Manager LP boosted its position in shares of Floor & Decor Holdings Inc (NYSE:FND) by 303.0% during the second quarter, Holdings Channel.com reports. The fund owned 40,927 shares of the company’s stock after acquiring an additional 30,772 shares during the quarter. Engineers Gate Manager LP’s holdings in Floor & Decor were worth $2,359,000 as of its most recent filing with the Securities and Exchange Commission.

A number of other hedge funds and other institutional investors have also recently added to or reduced their stakes in FND. Financial Architects Inc raised its stake in Floor & Decor by 400.0% during the 1st quarter. Financial Architects Inc now owns 1,000 shares of the company’s stock worth $32,000 after acquiring an additional 800 shares during the period. Lenox Wealth Management Inc. bought a new stake in shares of Floor & Decor during the second quarter valued at approximately $48,000. Capital Analysts LLC bought a new stake in shares of Floor & Decor during the second quarter valued at approximately $49,000. Private Advisor Group LLC bought a new stake in shares of Floor & Decor during the second quarter valued at approximately $56,000. Finally, Fifth Third Bancorp raised its position in shares of Floor & Decor by 69.1% during the first quarter. Fifth Third Bancorp now owns 2,117 shares of the company’s stock valued at $68,000 after buying an additional 865 shares during the last quarter.

Several equities research analysts have recently issued reports on FND shares. Morgan Stanley lifted their price objective on shares of Floor & Decor from $28.00 to $70.00 and gave the company an “equal weight” rating in a research report on Monday, August 3rd. TheStreet upgraded shares of Floor & Decor from a “c+” rating to a “b-” rating in a research report on Thursday, June 4th. Berenberg Bank started coverage on shares of Floor & Decor in a research report on Tuesday, June 23rd. They set a “buy” rating and a $74.00 price objective on the stock. Zacks Investment Research upgraded shares of Floor & Decor from a “hold” rating to a “strong-buy” rating and set a $76.00 price objective on the stock in a research report on Monday, August 3rd. Finally, Robert W. Baird lifted their price objective on shares of Floor & Decor from $60.00 to $75.00 and gave the company an “outperform” rating in a research report on Monday, July 27th. Eight equities research analysts have rated the stock with a hold rating, twelve have assigned a buy rating and one has assigned a strong buy rating to the stock. The company presently has an average rating of “Buy” and an average price target of $66.47.

Shares of FND stock traded up $2.01 on Monday, hitting $73.57. The stock had a trading volume of 8,205 shares, compared to its average volume of 1,443,758. The company has a quick ratio of 0.44, a current ratio of 1.56 and a debt-to-equity ratio of 1.30. The business has a 50 day moving average price of $69.60

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Why Planet Fitness and Floor & Decor Holdings Jumped Double Digits in August, but Camping World Fell 20%

What happened

Shares of construction-oriented retailer Floor & Decor Holdings (NYSE: FND) rose 11% in August according to data from S&P Global Market Intelligence. Gym company Planet Fitness (NYSE: PLNT) had an even better showing, rising 16.5%. However, all retail names didn’t do nearly that well, with recreational vehicle and outdoor specialist Camping World Holdings (NYSE: CWH) off by roughly 20.5% in the month. 

August represents an interesting turn of events when you step back and look at the earnings of each of these three retail names. To help put that in perspective, however, it helps to examine the price performance of the stocks between January and August. Over that eight month span Camping World Holdings was up 97%, Floor & Decor was up 44%, and Planet Fitness was down nearly 19%. For reference, the S&P 500 index was up 8.5% over the same period. 

An arm pointing to graph on computer screen

Image source: Getty Images.

So what

Planet Fitness is easily the biggest turnaround of the three when it comes to stock price. That makes complete sense given the impact of COVID-19 on its business. The company’s gyms were at the center of the pandemic storm, noting that the coronavirus is easily spread in group settings with a lot of heavy breathing going on. Not surprisingly, its gyms were shut down, cutting off revenue across its business. When it reported second-quarter earnings in early August the numbers were terrible, with revenue off by roughly 78% over the same quarter in 2019. Earnings fell to a loss of $0.36 per share compared to a profit of $0.41 per share in the previous year. Investors, however, had been expecting bad news. The focus, instead, was likely on the fact that the company had reopened 1,477 of its 2,059 gyms. Moreover, those numbers actually included 21 new gyms, as Planet Fitness is continuing to expand despite the current headwinds. Investors clearly think the future will be much brighter than the recent past, which is not at all an outlandish assumption given how bad things got during the shutdown.  

Floor & Decor reported earnings in late July and it, too, was hit by the impact of COVID-19. Sales were down by 11% in the quarter compared to 2019, with adjusted earnings off by nearly 62%. Like Planet Fitness, that bad news was largely expected. The news on the reopening front, meanwhile, was pretty good, as the company was able to reopen all of its locations in June. Furthermore, comparable-store sales growth was 7.7% in June, after a series of poor relative showings during the shutdown because shuttered stores don’t generate any sales. July’s strong number, however, showed that demand has picked up quickly as the retailer reopened its stores. Floor & Decor also announced it was increasing its new store opening plans for 2020 from 11 to 13 and reaffirmed its plans to expand its store base by roughly 20% in 2021. In other words, given the COVID-19 setback, Floor & Decor is still doing fairly well overall. One thing

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