2 Stocks in Focus From Buoyant Textile-Home Furnishing Industry – December 14, 2021

Although COVID-induced supply chain disruptions, rising raw material costs, and higher transport and labor costs continue to put pressure on margins for companies in Zacks’ textile and furnishing industries, the dynamics of the housing market, efficient cost management, and an ongoing focus on product innovation remain intact same dangers. Company like Mohawk Industries, Inc. (MHK quick offerMIC Free report) and Interface, Inc. (TILE quick offerTILE Free Report) benefited from strong end-market demand, acquisitions and strategic initiatives to increase profitability.

Industry description

The Zacks textile home furnishing industry includes manufacturers, designers, distributors, and marketers of flooring, carpets, and upholstery products. Products include carpets, rugs, ceramic tile, laminate, wood, stone, vinyl flooring, medium density fibreboard, luxury vinyl tile, vinyl sheet products, parquet and vinyl flooring, and roofing. They also offer knitted fabrics, jacquard fabrics, velvets, woven butt plates, piece-dyed woven products and polyurethane fabrics. Industry participants sell their products through a network of independently appointed sales representatives – including distributors, retailers, wholesalers, specialty stores and home centers – in the US and worldwide.

3 trends shaping the future of the textile home furnishing industry

Robust housing, repair and remodeling market: The solid momentum of the US real estate market, supported by the increasing need for more space to work at home and historically low mortgage rates, is expected to give industry participants a strong tailwind. The strong demand due to an improved housing market is a great boon for industry participants. Meanwhile, home or stay-at-home orders amid the COVID-19 pandemic have encouraged consumers to embark on more home improvement or home improvement projects and other home improvement projects. The industry is thus benefiting from a solid increase in repair and remodeling activities.

Product innovation & acquisitions: The industry participants have boosted sales in a highly competitive market with product innovations and expanded sales. Companies are trying to offset the higher costs with price increases, expansion into growing channels, and forays into new product categories and regions. In addition, the players are striving to make acquisitions in order to expand their product portfolio and expand their geographic presence and market share.

Rising costs, tense labor market & intense competition: Although the demand trend has improved due to robust US housing market fundamentals and repair and remodeling activities, industry players are bearing the brunt of the pandemic in the form of supply chain disruptions. Companies are seeing rising raw material costs in many product categories.

Rising raw material and transport costs as well as a tight labor market are reducing profit margins. Significant investments in new products, distribution networks and manufacturing facilities in a highly competitive environment are cause for concern.

Zacks’ industry rank suggests bullish outlook

The Zacks textile home furnishing industry is a group of four stocks within the broader Zacks consumer discretionary sector. The industry currently has Zacks industry rank number 117, which puts it in the top 46% of more than 250 Zacks industries.

The group’s Zacks industry rank, which is essentially the average of the Zacks rank of all member stocks, suggests good near-term prospects. Our research shows that the top 50% of Zacks ranking industries outperform the bottom 50% by a factor of more than 2 to 1.

Before we outline a few stocks to consider for your portfolio, let’s take a look at current stock market performance and the industry’s valuation picture.

Industry outperforms Sector and S&P 500

The Zacks textile home furnishing industry has outperformed the broader Zacks Consumer Goods and Zacks S&P 500 Composites sector over the past year.

Stocks in this industry are up 30.6% overall, while the broader sector is down 9.3%. The S&P 500 is up 28.2% over the same period.

Annual price development

Current evaluation of the industry

Based on 12 month price-earnings forwarding, which is a commonly used multiplier for valuing these stocks, the industry is currently trading 9.74 times versus 21.9 times the S&P 500 and the 22nd 1 times the sector.

For the past five years, the industry has traded up to 19.4X, up to 6.7X, and a median of 11.5X, as the chart below shows.

Industry price-earnings ratio (12-month forward) compared to the S&P 500

2 Textile Home Furnishing Stocks To Watch Out For

Below, we’ve discussed two stocks in the industry that have solid growth potential. The selected companies are currently ranked # 2 (Buy) or 3 (Hold) in Zacks. You can see the full list of current Zacks # 1 Rank (Strong Buy) stocks here.

interface: Headquartered in Atlanta, GA, this modular flooring company primarily operates in the Americas, Europe, and Asia Pacific. The company is benefiting from rising orders, mainly driven by growing demand in the Americas and parts of Europe and the Asia-Pacific region. It has taken initiatives to reduce the cost structure, strengthen the balance sheet, and improve cash flows which will help the company increase profits. With approximately 80% of its business related to renovation and remodeling, Interface is well positioned to benefit from the continued demand for remodeling activities. Additionally, increasing demand for carbon neutral and carbon negative products is expected to drive Interface’s growth as the company has focused on removing petroleum-based bitumen in favor of bio-based materials and recycled fillers.

Interface, a second-place Zacks company, grew 65.1% over the past year, outperforming the industry. The Zacks consensus estimate for 2021 and 2022 revenue has increased 4.9% and 5.8%, respectively, over the past 60 days. While 2021 gains are likely to reflect COVID-related issues, it is expected to grow 18.1% in 2022.

Price and consensus: TILE

Mohawk Industries: Based in Calhoun, GA, this company is a leading supplier of flooring for residential and commercial applications. The solid US real estate market and repair and remodeling activities benefited Mohawk. The dominant market share in the highly fragmented and competitive industry, the acquisition strategy and the strong international presence are intended to drive growth. It has streamlined operations, consolidated facilities, and removed more expensive assets to address cost issues.

Mohawk stock is up 30.2% over the past year. This Zacks-Rank # 3 company’s earnings are expected to grow 68% and 6.9% respectively in 2021 and 2022.

Price and consensus: MHK

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