Haverty Furniture: A Small-Cap – GuruFocus.com

by HomeDecorBeauty


Haverty Furniture Company (Ultra high pressure, finance) fly under the radar of most investors. That’s not surprising, as it closed on June 23 with a market cap of just $418.89 million.

However, I believe this stock deserves more attention. It has a GF score of 94 out of 100, one of the highest scores among thousands of listed stocks. It has excellent fundamentals, looks undervalued on several metrics, and has a dividend yield of over 4%.

About Haverty

Haverty, or Havertys Furniture as it refers to its retail locations, was founded in 1885 and is headquartered in Atlanta, Georgia. According to its website, it is a full-service home improvement retailer with more than 120 showrooms in 16 states in the South and Midwest, offering a wide range of items in the mid-to-high price range.

A typical client base is described in the 2021 10-K as follows: “Havertys clients are typically well-educated women from upper-middle-income households. They typically own homes in the suburbs, and their diverse personalities are reflected in their unique sense of style. .”

Because household goods are deferrable, the industry is sensitive to economic cycles. With some economic watchers now warning of a possible recession, investors should heed the following warning in the 10-K: “Consumer confidence and demand for household goods could deteriorate if the current economic recovery falters or the current housing recovery starts to stall. , which could adversely affect our business by affecting the performance of our stores.”

Meanwhile, Haverty has been in the business since 1885 and has seen many slow periods, many recessions and even some depressions. Given its stellar financial strength, it should emerge from the other end of the recession intact.

competition

As the 10-K points out, the retail side of home furnishing is fragmented and competitive. There are many other furniture retailers, as well as furniture manufacturers who run their own retail stores and department stores. This level of fragmentation has increased as e-commerce channels have grown.

Although it is a relatively small company, it claims to have several competitive advantages:

  • A product mix that appeals to affluent customers better than price-oriented stores.
  • A more practical online business than many competitors.
  • Custom features such as free on-site design and just-in-time delivery.

financial strength

Below is a screenshot of the company’s GuruFocus financial strength summary:

It ranks surprisingly low in the 6 out of 10 ranking for a company with no short-term or long-term debt, but it does have $197 million in long-term capital lease obligations and $162 million in cash and cash equivalents, So it needs to continue to generate cash to pay rent.

Despite its middling financial strength ranking, an Altman Z-Score of 3.51 suggests Haverty is unlikely to be at risk of bankruptcy within the next two years.

This is reinforced by the company’s ability to create value for shareholders. The Weighted Cost of Capital (WACC) was 7.87%, while the Return on Invested Capital (ROIC) was 17.30%.

Profitability

Haverty scores close to a perfect score for profitability, but falls short of a perfect 10 (out of 10) for several reasons.

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First, the operating margin in 2021 is a whopping 11.70%, but it has been in the mid-single digits for most of the past decade.

Second, there are issues of consistency and predictability of profitability. It has a business predictability rating of 3.5 out of 5.

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Dividends and buybacks

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Shares traded at $24.95 at the close on June 24, and Haverty’s dividend yielded 4.01%. That’s a very good yield, in part due to a drop in the stock price.

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Shareholders have also seen modest gains from an average of 1.93% annual share buybacks over the past decade.

Valuation

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The share price has surprised Haverty investors several times. When we add the trendline, it seems to have returned to the mean:

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In the short term, we can say that the company is already severely undervalued. But in the long run, the valuation is reasonable.

Its price-to-earnings ratio is as low as 5.14, about a third of the industry median of 15.26. According to GuruFocus, it is cheaper than 91.13% of the 778 companies in the retail cycle industry.

The five-year Ebitda growth rate is 10.00% per annum, which results in a PEG ratio of 0.51, which indicates that the stock is undervalued.

According to the GF Value Chart, the stock is moderately undervalued:

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Haverty has a business predictability score of 3.5 out of 5, so a discounted cash flow (DCF) calculator might also be helpful. I ran the GuruFocus DCF calculator for stocks using the following assumptions:

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These assumptions include an annual growth rate of 17.30% in the growth phase. As you’ll recall from the EPS chart shown above, this metric has skyrocketed in 2020 and 2021. Cautious investors should assume that this accelerated growth will not continue.

GF scores higher than most stocks, with 94 out of 100:

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Grandmaster

Five gurus held shares in Haverty at the end of the first quarter, with the following three holding the largest positions:

  • Jim Simmons

    Renaissance Technologies (Trades, Portfolio) reduced its company holdings by 6.16% and ended the quarter with 1,083,606 shares. This represents 6.49% of Haverty’s outstanding shares and 0.03% of the fund’s assets under management.
  • Hotchkis & Wiley ended the quarter up 25.48% with 350,950 shares.
  • Chuck Royce

    Royce Investment Partners (Trades, Portfolio) cut 18.72% to 349,475 shares.

in conclusion

In my opinion, Haverty Furniture deserves the attention of investors buying small-cap value stocks — especially those who want an undervalued stock with good fundamentals and an above-average dividend. However, given the current likelihood of a recession, investors may want to consider how Haverty will fare if the economy slows.

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