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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Floor & Decor Is Priced For Perfection (NYSE:FND)

The market momentum behind Floor & Decor Holdings (FND) is strong. The company’s stock has completely shrugged off the March market sell-off and has been trading at its all-time highs of approximately $70 per share.

The market strength has been shared with other home improvement retailers, with Home Depot (HD), Lowe’s (LW), and Lumber Liquidators (LL) all showing the same pattern and momentum.

We believe the strength in FND can be attributed to a strong rebound in sales and management’s commitment to growing its new store footprint by 20% in 2021 and beyond. The company is already planning the opening of 27 new stores in 21 on top of the 13 stores opened year-to-date.

The added scale is a plus to margins moving forward, as it would give them the ability to take costs out from their suppliers with the increase in volume. Also, there is leeway for margin improvement once the company stops with its store expansion plans, allowing for a higher percentage of the incremental revenues to fall to the bottom line. Management believes FND can achieve long-term EBITDA margins of 15% or higher, compared to EBITDA margins of 11.7% in 2019.

From a valuation perspective, the company is trading at a forward earnings multiple of 47x, almost double the forward P/E of HD at 25x. LL and LOW trade at 18x and 19x respectively.

While the forward PE of 47x sounds exuberant, we need to acknowledge the impressive growth rates of FND. For example, the company has managed to grow revenues and EPS at a 3-year CAGR of 19.8% and 26.6%, respectively, compared to 7% and 6.4% for HD. That said, maintaining such high growth rates would depend on the achievement of reaching 400 stores, the target set by management. Any slow down in new store growth could cause multiples to contract, as expectations deflate.

At this point, paying 47x for FND’s forward earnings doesn’t look like a good risk/reward opportunity. Besides the high expectations embedded in its share price, the company is not immune to the effects of COVID-19. Q2 results showed declining sales as the company was affected by the pandemic.

We believe the stock is too hot right now and we would rather wait on the sidelines.

Sequential improvement; quarter-to-date sales up 16%

FND reported second-quarter sales of $462M, down 11% on a year-over-year basis but beating sales expectations by $40M. The company also reported a non-GAAP EPS of $0.13 beating the consensus by $0.06.

Second-quarter sales were impacted by a decline of 20.8% in comparable-store sales due to COVID-19 and related store closures. Management transitioned to a curbside pickup model after closing their stores to help offset the decline in sales. Total comparable store transactions declined by 22.3% during the quarter compared to its prior-year period, while the average ticket increased by 2%, highlighting trip consolidation by their customers.

On a monthly basis, store sales have been improving sequentially, with comparable-store sales down 51% in April, improving to a 26% decline in May

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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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Floor & Decor: Hold Your Nose And Buy (NYSE:FND)

(Image source)

Home improvement stocks have been all the rage since the March bottom. Consumers have spent enormously on things like furniture, appliances, paint, and what matters for our subject here, flooring. Consumers have held up much better through this recession than many – including me – thought they would at the beginning of this pandemic. That has seen companies like Floor & Décor (FND) accrue huge benefits, not the least of which has been a higher share price.

FND tripled from the March bottom to the end of August, and has pulled back slightly with the broader market. However, the company has proven it is a market leader, and until it is proven otherwise, you have to respect the strength it has shown.

Indeed, if we look at the relative strength panels in the bottom of the chart, we can see that the home improvement retailers have outperformed the broader market this year, and by a huge margin since the bottom in March. That means that even the average stocks in the group have a great chance of outperforming the market.

FND, however, has been very strong against its peer group, meaning it is a stock that is outperforming an outperforming group. If you’re looking to buy a stock, buying the best stocks in the best groups is the best way to try and beat the market.

The company’s valuation is enormous and it isn’t perfect, but the market has spoken, and I think the growth of FND overpowers its relative lack of value.

Growth remains a huge factor

We’ve seen during this rally that growth is being rewarded in a big way. Stocks with the best growth prospects have outperformed those that don’t have it, and FND is no exception.

(Source: Seeking Alpha)

Its revenue has flown higher in recent years, as the company has rapidly expanded its store base. FND has capitalized on what was a relatively small footprint, and has entered more markets while optimizing those where it was already present. The result is what you see above, with hugely impressive revenue growth. FND is nowhere near done growing its store base, as the company reckons it will open 13 stores this year and will grow its new store base by 20% next year. It still only has 125 stores nationwide, so there remains a huge runway for future growth in the store base.

Importantly, the company has proven its model can work in a variety of markets and conditions, as it offers a value proposition to consumers. So long as consumers continue to spend their money on home improvements, FND stands to win.

We can see below that the company has produced wildly different comparable sales gains that have helped boost revenue in different amounts in the past few years.

(Source: TIKR.com)

FND’s comparable sales decelerated in recent years, but I think it is quite telling that comparable sales are slated to be positive this year. Considering the economic disruption – to put it lightly

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