Over the past 15 years of my investing experience, I have discovered that the most powerful form of investing if you want attractive returns involves marrying value investing with contrast investing. Basically buying Cheap stocks that go against the general trend can lead to a rather attractive uptrend. This is because the market often overreacts when it becomes clear that pain is just around the corner. One company that has done reasonably well over the past two months that fits this category is Haverty Furniture Companies (New York Stock Exchange: HVT) (New York Stock Exchange: HVT.A). Stocks have marginally outperformed the market. Even with this outperformance and despite the recent weakness associated with its earnings and earnings, the stock still looks attractively priced, both on an absolute basis and relative to comparable companies. given these The facts, I would argue that more upside for the company is still in order. As such, it has decided to retain the Company’s rating as Buy for the time being.
Market conditions are not the best
So far, the picture for the furniture industry is not entirely great this year. Take the data from the US Census Bureau, for example. In the first five months of this year, sales related to furniture stores amounted to $55.63 billion. This is down 2.9% compared to the same time one year ago. But what’s interesting is that the picture is getting worse. In May, for example, revenue totaled $11.46 billion. That’s 4.5% down from the roughly $12 billion reported one year ago. On an adjusted basis, the situation is worse, with sales down 6.4% nationwide.
This downturn shouldn’t be all that shocking to those who follow broader economic conditions closely. Furniture and related products are some of the most expensive items that people buy. The obvious exceptions would be homes and cars. Expensive items often require financing from a consumer perspective. And with interest rates rising in an effort to combat inflation, and a significant weakness in the housing market, the desire to buy furniture is less. One of the contributing factors to this decline may be the high vacancy rates among office properties. The good news is that things won’t always be like this. Current projections, for example, are for the furniture market to grow at an annual rate of about 5.2% between 2023 and 2028.
Looking at haverty furniture again
In the long run, this is good for any company in the furniture business. But in the short term, it can lead to some pain. This is the kind of pain we’re currently seeing when it comes to Haverty Furniture. During the first quarter of the company’s fiscal 2023 fiscal year, revenue totaled $224.8 million. That’s 5.9% down from the $238.9 million in revenue generated at the same time last year. Management attributed the drop to a 6.7% drop in comparable-store sales, while adding the same issues with inflationary pressures and rising interest rates to stock market volatility as management’s explanation for the reason for lower sales during this time.
This does not mean that everything for the company suffers. Management said the free in-home design service continues to expand. During the most recent quarter, the company generated 26% of its revenue as a result of these activities. This compares to 23% in 2022. The company also saw a 4.1% rise in the average value of the transactions it processes. This grew from $3,066 to $3,192. Management said this was largely the result of price hikes aimed at pushing inflationary pressures on the company’s customers.
Unfortunately, the company didn’t have the possible pricing ability to fully realize that. Net income, for starters, was $12.4 million during the first quarter of the company’s fiscal 2023 fiscal year. This was less than the $19.4 million collected one year earlier. Other profitability metrics followed suit. Operating cash flow decreased from $20.6 million to $11.1 million. If we adjust for changes in working capital, we get a decrease from $24.1 million to $17.9 million. Finally, the company’s EBITDA decreased from $29.9 million to $18.8 million.
Given the data we’re looking at today, I have no doubt the business will see further weakness. But that won’t necessarily prevent the company from delivering value to its shareholders. As of the end of last quarter, the company had $127 million worth of cash and cash equivalents on its books. This includes $6.9 million that guarantees workers’ compensation liabilities that may or may not be required depending on the claims. It also enjoyed zero debt. In the past, the company’s cash balance was even higher. However, management has been very active when it comes to returning cash to shareholders. In 2022 alone, the company has set aside $30 million for share buybacks and another $33.9 million for dividends. It appears as though management plans to continue returning cash to shareholders. But that won’t stop the company from opening five new stores this year, closing one store, and maintaining its existing locations, all at a combined cost of $28 million.
Management has not provided any guidance when it comes to the current fiscal year. But if we convert the results achieved year-to-date, we get net income of $57.1 million, adjusted operating cash flow of $85.3 million, and $84.8 million before interest, taxes, depreciation, and amortization. In the chart above, you can see how stocks are priced on a forward basis and how they are priced using data from 2022. Even if we use projected numbers for 2023, the stock looks very attractive on a forward basis. In the table below, I decided in the meantime to compare the company to five similar companies. Using a price-to-earnings approach and an EV-to-EBITDA approach, I found that only one of the five companies ended up being cheaper than Haverty Furniture. Meanwhile, using the price to operating cash flow approach, two of the five were cheaper than our target.
|a company||Price/earnings||Price/operating cash flow||EV/EBITDA|
|Aaron Corporation (AAN)||23.9||2.2||1.1|
|Bedding whore (hooft)||25.3||7.4||228.6|
|sleep number (SNBR)||14.8||22.5||7.0|
When I last wrote about Haverty Furniture in early May of this year, I concluded that the company was cheap enough and basically attractive enough to warrant the “Buy” rating I had previously assigned it. Since then, the stock has outperformed the broader market, but only marginally. While the S&P 500 rose 6.5%, shareholders in Haverty Furniture saw a gain of 7.1%. I expect that recent weakness will continue for the foreseeable future. But I’d also like to demonstrate that stocks are cheap enough to warrant optimism in this environment. Given these facts, I have no problem maintaining the company’s rating as a Buy for the time being.
Editor’s note: This article covers one or more smaller cap stocks. Please be aware of the risks associated with these stocks.