The economy continues to show robust recovery led by a robust housing market. New single-family house sales unexpectedly rose 6.2% to a seasonally adjusted annual rate of 685,000 this October. We are near-term bullish on our home improvement- and construction-related recommendations including Home Depot, Lowe’s and Toll Brothers. In the long-term view, we are also bullish on home improvement retailer Williams-Sonoma, which saw a dip after its last quarterly earnings release.
Signet Jewelers (SIG), as noted in my November 22 Special Bulletin, saw a 30% drop since its Q3 earnings release. The decline was related to a decrease in same-store sales and temporary hurricane and technology-related incidents. From a long-term (three- to five-year) perspective, this could be an opportunity to accumulate shares and hold. In the near term, I expect stock price swings to continue into Q4 due to ongoing technical disruptions. My bet is on the new management’s strategic imperatives, which will increase the company’s omnichannel presence considerably. With Signet’s 15% market share, proper strategic execution will lead to a healthy long-term position. My fair value is revised to 70, down from 78, due to the ongoing uncertainties. If you already hold shares, I recommend accumulating more to reduce your average cost. HOLD.
Retail, in general, a tough business. Even retail companies with terrific growth often nosedive into bankruptcy. I encourage you to not have considerable exposure to the retail segment because online competition is causing uncertainty in the industry. Our recommendations, Home Depot and Lowe’s, are relatively safe within the retail sector because their online competition is limited. And discount stores such as Ross Stores and Big Lots have shown good growth.
Ross Stores (ROST) has touched its fair value of 73 after releasing strong third-quarter earnings with 16% YoY increase in EPS and 8% growth in sales. Considering the company’s strong growth and additional share repurchase program, I’m revising the stock’s fair value to 80. This revision is only 7% above the current price of 76, so it may not be considered a long-term value stock with a reasonable margin of safety. SELL A PORTION.
Big Lots (BIG), on the other hand, is trading at a good discount with a 14x price-to-earnings ratio. This discount is mainly due to its underperformance in sales and lower margin compared to other off-price stores such as TJ Maxx, Ross Stores and Burlington Stores. The stock price has almost touched our fair value of 59, though I may raise the fair value after management’s earnings call tomorrow. HOLD.
Home Depot (HD) and Lowe’s (LOW), two leading home improvement retailers have shown good growth as the housing market is back on track. Historically, Home Depot has shown stronger growth and profit margins, and thus Home Depot is valued higher than Lowe’s. The premium given to Home Depot by the market is justified. My fair value estimate of Home Depot and Lowe’s are revised to 194 and 94 respectively. HOLD.
Thor Industries (THO) released its 2018 Q1 earnings this week. Sales increased 30.6% YoY to $2.23 billion, while the EPS increased 63% to $2.43/share. The RV industry has seen steady growth as baby boomers are showing increasing interest in RVs. The market share of towable RVs and motorized RVs increased to 48.9% and 41.7% respectively. Income before tax of towable RVs increased from 7.7% to 9.7%.
Out of 413,269 RVs sold in U.S. in 2016, Thor accounted for 195,973 RVs (47.4% market share). Among Thor’s competitors, Forest River (owned by Berkshire), accounts for 35.1% of market share, and is lagging Thor in sales growth. Among its small competitors, Grand Design, owned by Winnebago, has been showing robust growth, though a threat from Grand Design is not an immediate concern because its market share is only 3.7%.
With virtually no sub-prime, RVs have enough room for credit-related sales growth. As the market leader, Thor is expected to grow with increasing demand in the short term. From a long-term (five-year) perspective, the stock is decently priced with a P/E of 19 and a 5% free cash flow yield. I estimate a fair value of 166. HOLD.
Closing prices on November 29, 2017.
