For immediate release
Chicago, IL – April 19, 2022 – Today Zacks Equity Research discusses Mohawk Industries, Inc. MHK and Interface, Inc. TILE.
Although COVID-induced supply chain disruptions, rising raw material costs, and rising transportation and labor expenses continue to pressure margins at Zacks’ businesses Textile-Furniture industry, continued housing market momentum, effective cost management and continued focus on product innovation have resulted in the same. Companies like Mohawk Industries, Inc. and Interface, Inc. benefited from strong end-market demand, acquisitions and strategic initiatives to drive profitability.
Description of the industry
The Zacks Textile-Home Furnishing industry includes manufacturers, designers, distributors and distributors of flooring, carpeting and upholstery products. Products include carpet, rug, ceramic tile, laminate, wood, stone, vinyl flooring, medium density fiberboard, luxury vinyl tile, vinyl products sheet, hardwood and vinyl flooring and roofing elements.
They also offer knits, jacquard fabrics, velvets, woven dobbies, piece-dyed woven products, and polyurethane fabrics. Industry participants sell their products through a network of independent sales representatives – including distributors, retailers, wholesalers, specialty stores and home centers – in the United States and around the world.
3 trends shaping the future of the textile and furniture industry
Increased demand from the repair and renovation market: The strong demand stemming from the improvement in the residential construction market is a major windfall for industry players. Meanwhile, work-from-home or stay-at-home orders amid the COVID-19 pandemic have encouraged consumers to take on more DIY projects and other home improvement projects. Thus, the industry should benefit from a solid increase in repair and renovation activities.
Product innovation and acquisitions: Industry players have boosted sales through product innovation and distribution expansion in a highly competitive market. Companies are trying to offset higher costs by raising prices, expanding into growing channels, and entering new product categories and geographies. Additionally, players are pursuing acquisitions to broaden their product portfolio and expand their geographic footprint as well as market share.
Rising costs, tight labor market and intense competition: Although the demand trend has improved on the back of strong U.S. housing market fundamentals and repair and renovation activity, industry players have borne the brunt of the pandemic in the form of supply chain disruptions. supply. Companies have seen rising raw material costs across many product categories.
Rising raw material and transportation costs and a tight labor market are eating away at profit margins. Significant investments in new products, a distribution network and manufacturing facilities in a highly competitive landscape raise concerns.
Zacks’ industry rankings point to boring prospects
The Zacks Textile-Home Furnishing industry is a group of four stocks within the whole Zacks Consumer Discretionary sector. The industry currently carries a Zacks industry ranking of #229, which places it in the bottom 10% of over 250 Zacks industries.
That of the group Zacks Industry Ranking, which is essentially the average of the Zacks Ranking of all member stocks, indicates a lukewarm near-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of industries ranked by Zacks is the result of poor earnings prospects for constituent companies overall. Looking at revisions to aggregate earnings estimates, it appears analysts are gradually losing confidence in the earnings growth potential of this group. Since February 2022, industry earnings estimates for 2022 have been revised down by 12.8%.
Despite the industry’s weak short-term view, we’ll feature a few stocks one might consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
The industry is lagging the sector and the S&P 500
The Zacks Textile-Home Furnishing industry has lagged the broader Zacks Consumer Discretionary sector and the Zacks S&P 500 composite over the past year.
Shares in this industry collectively lost 38.3% compared to the 25.2% drop in the broader sector. Meanwhile, the S&P 500 climbed 5.8% over the same period.
Current industry assessment
Based on the 12-month forward price-to-earnings ratio, which is a multiple commonly used to value these stocks, the sector is currently trading at 7.36X versus 19.1X for the S&P 500 and 21.36X for the sector.
Over the past five years, the industry has traded as low as 19.41X, as low as 6.74X and at a median of 11.04X.
2 Textile-Furniture stocks to watch closely
Below, we have discussed two industry stocks that have strong growth potential. Chosen companies currently carry a Zacks Rank #3 (Hold). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Interface: Based in Atlanta, Georgia, this modular flooring company operates primarily in the Americas, Europe and Asia-Pacific. TILE benefited from the increase in orders, mainly driven by growing demand in America and parts of Europe as well as Asia-Pacific. She has taken initiatives to reduce the cost structure, strengthen the balance sheet and improve cash flow which will help the company generate profits.
As approximately 80% of the business involves renovation and remodeling work, Interface is well positioned to benefit from sustained demand for remodeling activity. Additionally, growing demand for carbon-neutral and carbon-negative products is expected to drive Interface’s growth as the company has focused on eliminating petroleum-based bitumen in favor of bio-based materials and recycled fillers.
Interface – a Zacks No. 3 ranked company – has gained 2.5% over the past year, outperforming the industry. Although Zacks’ consensus estimate for its 2022 revenue has declined over the past 60 days, it has increased 6.8% for 2023. Although 2022 revenue likely reflects on-chain issues supply and rising raw material and labor costs, the same for 2023 is expected to grow by 13.6%.
Mohawk Industries: This Calhoun, Georgia-based company is a leading supplier of flooring for residential and commercial applications. A strong US housing market and repair and renovation activity benefited Mohawk. Its dominant market share in the highly fragmented and competitive industry, its acquisition strategy and its strong international presence are expected to drive growth. It has streamlined its operations, merged facilities and removed more expensive assets to combat cost issues.
Mohawk stock has lost 38.1% over the past year. Although the 2022 earnings of this Zacks Rank No. 3 company are expected to register a decline, the same for 2023 will likely increase by 14.7%.
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Past performance is not indicative of future results. The potential for loss is inherent in any investment. This document is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold any security. No recommendation or advice is given as to whether any investment is suitable for any particular investor. It should not be assumed that investments in the securities, companies, sectors or markets identified and described have been or will be profitable. All information is current as of the date hereof and is subject to change without notice. The views or opinions expressed may not reflect those of the company as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management of securities. These returns come from hypothetical portfolios composed of stocks with Zacks Rank = 1 that have been rebalanced monthly without transaction fees. These are not the returns of actual stock portfolios. The S&P 500 is an unmanaged index. To visit https://www.zacks.com/performance for more information on the performance figures displayed in this press release.
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