Underrated Stock Buffett Bought: 2022 wasn’t such a great year for the S&P 500 and June was among the worst months. The index fell 8% overall, with many industries – such as the IT and communications sectors – chalking up losses as high as 27% over the period.
In fact, investor sentiment was pretty awful as Q2 came to a close, with fears surrounding the war in Ukraine, runaway inflation, and rising energy costs all weighing heavy on peoples’ minds.
One issue that’s particularly worrying is the state of the housing market right now. Indeed, according to figures released by Freddie Mac, the average 30-year mortgage rate jumped from 5% at the start of June, to 5.7% at its close.
Unfortunately, rising interest rates often lead to a slowdown in the wider market too, spelling trouble for companies like Floor & Decor
, whose business is subject to prevailing trends within the home-improvement space as well.
That said, while many other businesses are suffering, FND isn’t your typical home-improvement retailer. The firm sports some excellent underlying growth metrics, and has grand ambitions to expand its footprint across the nation.
Not only that, the company’s becoming a staunch favorite of Wall Street legend Warren Buffett, who’s recently added a lot more Floor & Decor shares to Berkshire Hathaway’s roster. Indeed, the wise old investor first bought FND in the third quarter of 2021, and has been snapping up plenty more of the enterprise since then, most recently in the first quarter of 2022.
So, what is it about the business that the Oracle of Omaha finds so special – and would it make a good addition to your own investment portfolio too?
Floor & Decor Just Can’t Stop Growing
Floor & Decor is the largest flooring retailer in the United States. As such, you might be forgiven for thinking that the company doesn’t have much room left when it comes to finding further opportunities for growth.
In fact, after benefiting from strong pandemic tailwinds the last couple of years, it probably seems more likely that the business is about to go into a contraction and consolidation phase after such a profitable spell.
However, it appears to be the precise opposite that’s happening. Floor & Decor just reported 13 consecutive years of same-store sales growth, with an adjusted EBITDA of $135.8
up 6.8% in the first quarter too.
Indeed, the company’s adjusted earnings have also been accelerating at a rapid clip, growing 62.7% in 2021 to come in at $2.44 per share.
Price Action and Valuation
Floor & Decor’s share price
dropped pretty sharply this year. The company’s down 32% since the start of January, and is currently a massive 51% off its all-time high of $145.
Indeed, FND’s stock has given up the best part of the pandemic gains it reaped throughout the last few years – which isn’t surprising since it’d grown more than 400% from lows of $27 at the outbreak of the coronavirus crisis.
However, there’s no doubt that the double whammy of global supply chain disruptions and record levels of inflation has set the company’s share price back more than would normally have been expected.
With that in mind, the question is whether Floor & Decor is either overpriced or undervalued just now.
To begin with, FND’s financial multiples give a mixed picture on the state of the company’s health. The firm trades at a relatively high 29-times its trailing twelve-month earnings, which is steep even for the Consumer Discretionary sector.
That said, this ratio is projected to come down to around 25-times next year, as its profits are expected to increase.
Furthermore, Floor & Decor actually outperforms the broader market when it comes to revenue growth. Indeed, for the first quarter of 2022, FND’s net sales increased 31.5% year-on-year to $1.03 billion, while its comparable-store sales grew 14.3% during the period too.
A Strong Business With A Wide Moat
In addition to a quantitative assessment of Floor & Decor’s prospects, we can also take a qualitative approach too.
And it’s here that FND really shines – the company has an excellent business model that leverages the power of its operating moats to ensure a competitive advantage in the industry marketplace.
For instance, Floor & Decor already has a substantial physical presence in the country, but the company still has plans to almost triple its current store numbers to 500 over the coming years.
Furthermore, FND delivers on customer experience – which is something that the company believes is key in helping distinguish it from its closest rivals.
As a matter of fact, in its latest investor presentation, FND describes itself as a “disruptive high growth specialty retailer.” It cites its large, visually inspiring stores, expert designers, and unique direct supply chains as reasons for its differentiation.
Is FND A Buy?
According to BlueWeave Consulting, the global home improvement sector was worth upwards of $333 billion in 2021
. Moreover, the market’s expected to expand at a CAGR of 6.40% over the next five years, suggesting the industry could be valued in excess of more than half a billion dollars before the end of the present decade.
As the preeminent player in both the commercial and domestic flooring market, FND is ready to exploit this growing industry to the full. Its recent price correction just makes the company even more enticing, and, with its ambitious plans for the future, the stock seems exceedingly cheap at today’s valuation.
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