Outlook For Textile-Home Furnishing Stocks Appears Bright

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 housing market rebound is expected to provide a major tailwind to the industry participants in the near term. The industry participants are likely to experience higher demand, courtesy of a solid housing market scenario backed by an increase in disposable income, a lower unemployment rate and improving consumer confidence. Also, higher construction spending activity has turned out to be a boon for the Textile-Home Furnishing industry, boosting companies’ revenues and profits. Also, the recent decline in mortgage rates has been driving existing as well as new home sales, which in turn would provide a modest bump to repair and remodeling activity in the near term.
  
• 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.
  
• On the flip side, rising cost of raw material and transportation a stronger dollar and a tight labor market are hurting profit margins. Significant investments in new products, distribution network and manufacturing facilities in a highly competitive landscape raise concerns. Moreover, the entire industry space has been reeling under trade-war fears after the introduction of tariffs on Chinese imports by the Trump administration. The threat of tariffs on imports and retaliatory tariffs on exports spells trouble for the industry. Higher tariffs make sourcing difficult for home furnishing manufacturers, pushing up costs. Further, disruptions in supply chains due to the coronavirus outbreak may hinder growth.

Zacks Industry Rank Indicates Bullish 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 #108, which places it in the top 42% 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since November 2019, the industry’s earnings estimates for 2020 and 2021 have gone down by 2.6% and 13.4%, respectively.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

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.

The industry has declined 8.6% over this period against the broader sector’s rise of 1.5%. The S&P 500 has risen 12.5% in the said time frame.

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 9.6X versus the S&P 500’s 17.9X and the sector’s 18.6X.

Over the past five years, the industry has traded as high as 19.41X, as low as 9.03X and at the median of 15.17X, as the chart below shows.

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





Bottom Line

Increased costs of raw material, transportation and labor continue to build pressure on margins. Nonetheless, a boost in construction spending is conducive to the industry’s growth. Also, improving housing market fundamentals, efficient cost management and continued focus on product innovation are expected to drive growth.

Only one stock in the Zacks Textile-Home Furnishing space currently carries a Zacks Rank #2 (Buy). 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 43.9% and 36.7%, respectively.

Price and Consensus: CULP

Investors might also prefer holding on to the following stocks, which currently carry a Zacks Rank #3 (Hold).

Interface, Inc. (TILE): Headquartered in Atlanta, GA, Interface is the world's largest manufacturer of modular carpet. The company’s earnings for 2020 are expected to grow 3.1%. The stock has return on equity (ROE) of 26.2%, higher than the industry’s 7.1%.

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 7.7%.

Price and Consensus: MHK

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 grow 231.8%.

Price and Consensus: SIC

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