2 Textile home furnishing stocks in focus amid industry challenges

Although COVID-related supply chain disruptions, rising raw material costs, and higher transportation and labor costs continue to put pressure on margins for companies in the Zacks Textile-Home Furnishing industry, continued housing market momentum, efficient cost management and focus on the Product innovation have advanced the same. companies like Mohawk Industries, Inc. MIC and Interface, Inc. TILE benefits from strong end market demand, acquisitions and strategic initiatives to increase profitability.

Industry Description

The Zacks Textile-Home Furnishing Industry includes manufacturers, designers, retailers and marketers of flooring, carpet and upholstery products. Products include carpet, rugs, ceramic tile, laminate, wood, stone, vinyl flooring, medium density fiberboard, luxury vinyl tile, vinyl sheet products, hardwood flooring and vinyl flooring, and roofing. They also offer knits, jacquards, velvets, woven dobbies, piece-dyed wovens and polyurethane fabrics. Industry participants sell their products through a network of independently engaged sales representatives – including distributors, retailers, wholesalers, specialty stores and home centers – in the United States and worldwide.

3 trends shaping the future of the textile home furniture industry

Higher demand from the repair and conversion market: Strong demand due to an improving housing market is a major boon for industry participants. Meanwhile, work-from-home or stay-at-home orders amid the COVID-19 pandemic have encouraged consumers to tackle more do-it-yourself and other home improvement projects. So, the industry will benefit from a solid increase in repair and rebuild activity.

Product Innovation & Acquisitions: Industry participants have boosted sales with product innovations and expanded distribution in a highly competitive market. Companies are attempting to offset higher costs by raising prices, expanding in growing channels, and entering new product categories and geographies. In addition, players are pursuing acquisitions to expand their product portfolio and expand their geographic footprint and market share.

Rising costs, a tight labor market and intense competition: Although the demand trend has improved on the back of resilient US housing market fundamentals and repair and remodeling activity, industry players have borne the brunt of the pandemic in the form of supply chain disruptions. Companies are experiencing rising raw material costs in many product categories.

Rising raw material and transportation costs and a tight labor market are squeezing profit margins. Significant investments in new products, distribution networks and production facilities in a highly competitive environment are a cause for concern.

Zacks’ industry ranking suggests a bleak outlook

The Zacks Textile-Home Furnishing Industry is a four-stock group within the broader Zacks Consumer Discretionary sector. The industry currently has a Zacks industry rank of #229, placing it in the bottom 10% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates near-term prospects. Our research shows that the top 50% of industries evaluated 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 a result of the tepid earnings outlook for each company overall. Looking at the revisions to the aggregate earnings estimates, it seems that analysts are beginning to lose confidence in the growth potential of this group. Since February 2022, the industry’s 2022 earnings estimates have been revised down by 12.8%.

Despite the bleak short-term outlook for the industry, we’ll highlight a few stocks to consider adding to your portfolio. Before doing so, it is worth taking a look at the shareholder returns and the current assessment of the industry.

Industry lags behind sector & S&P 500

The Zacks Textile & Homes sector underperformed the broader Zacks Consumer Discretionary sector and the Zacks S&P 500 Composite over the past year.

Shares in this industry are down 38.3% overall, while the broader sector is down 25.2%. Meanwhile, the S&P 500 is up 5.8% over the same period.

One-year price development

Current rating of the industry

Based on the 12-month forward price-to-earnings multiple, which is a commonly used multiple to value these stocks, the industry is currently trading at 7.36X versus the S&P 500’s 19.1X and the sector’s 21.36X .

Over the past five years, the industry has traded as high as 19.41X, as low as 6.74X and at a median of 11.04X, as shown in the chart below.

Industry P/E (12-month forward) versus the S&P 500

2 textile home furnishing stocks to keep a close eye on

Below, we’ve reviewed two stocks from the industry that have solid growth potential. The selected companies currently carry a Zacks Rank #3 (Hold). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks can be found here.

interface: This modular flooring company, headquartered in Atlanta, GA, has primary operations in the Americas, Europe and Asia Pacific. TILE is benefiting from rising order intake, mainly driven by growing demand in the Americas and parts of Europe, as well as the Asia-Pacific region. It has taken initiatives to reduce the cost structure, strengthen the balance sheet and improve cash flow, which will help the company increase its profits. With around 80% of its business involving renovation and remodeling, Interface is well positioned to benefit from continued demand for remodeling. Additionally, increasing demand for carbon neutral and carbon negative products is expected to drive Interface’s growth as the company has focused on moving away from petroleum-based bitumen in favor of bio-based materials and recycled fillers.

Interface — a Zacks Rank #3 company — is up 2.5% over the past year, outperforming the industry. Although the Zacks consensus estimate for 2022 earnings has declined over the past 60 days, it is up 6.8% for 2023. While 2022 earnings are likely to reflect supply chain-related issues and higher raw material and labor costs, the same is true for 2023, which is expected to grow by 13.6%.

Price and consensus: TILE

Mohawk Industries: Based in Calhoun, GA, this company is a leading supplier of flooring for residential and commercial applications. A solid US housing market and repair and remodeling activity have benefited Mohawk. Its dominant market share in the highly fragmented and highly competitive industry, its acquisition strategy and strong international presence should drive growth. It has streamlined operations, merging facilities and removing more expensive assets to combat cost concerns.

Mohawk stock is down 38.1% over the past year. Although earnings for this Zacks-ranked No. 3 company are expected to decline in 2022, the same is likely to rise 14.7% in 2023.

Price and consensus: MIC

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