Floor & Decor is Wednesday's IBD Stock Of The Day as the hard flooring leader aims to keep growing through the housing downturn. FND stock has found support at its 50-day moving average this week, setting up a potential early entry point.
In a Feb. 15 note, Citi analyst Steven Zaccone said he sees FND stock as a way to go on "offense" in a soft-landing scenario for the economy. He's got a buy rating and 110 price target on the shares.
Have Home Sales Hit Bottom?
Here's the somewhat bullish case laid out by Floor & Decor management on their Feb. 23 Q4 earnings call.
Existing-home sales offer the most relevant economic data point for Floor & Decor's business. Already, existing-home sales have slumped from above a 6-million-unit annual rate in 2021, fueled by a Covid-era housing boom, to a 4-million rate in January.
From a longer perspective, the current 4 million level is where the market hit bottom in May 2020. The last time existing-home sales undercut that level was at the nadir of the housing bust in 2010, but it didn't stay there for long.
Assuming FND is correct and that existing-home sales have hit a floor, the company expects comparable-store sales to be flat to down 3% this year. Part of that reflects lower pricing as FND gives customers some of the benefits of unwinding supply-chain pressures. Importantly, newer stores take a few years to reach maturity, providing several years of accelerated growth.
FND added 32 warehouse stores last year and expects to open another 32 to 35 this year, up 17%-18%, while taking market share from the competition. The company sees total revenue rising 8%-11.5%. Adjusted EBITDA should grow 5%-12.7%.
Although sales growth slowed to 15% in Q4, EPS growth accelerated to 45%. Loop Capital analyst Anthony Chukumba notes that gross margins rose, breaking a string of five straight declines. He hiked his FND stock price target to 82 from 65, but kept a hold rating, despite being bullish on its long-term prospects.
Floor & Decor's unmatched breadth of supply and everyday low prices has helped it win more professional contractor customers. Pros accounted for more than 40% of sales last year, up from 35% in 2021.
Mortgage-Rate Risk
Trevor Lang, Floor & Decor president, acknowledged "there could be risk to our plan," if existing-home sales fall to historical lows.
The average 30-year fixed mortgage is back at 7%, after falling as low as 6% at the start of February, according to Mortgage News Daily. A key question that looms large for FND stock is whether mortgage rates are near a peak. That would potentially allow home sales to stabilize.
The 30-year mortgage rate is loosely tied to the 10-year Treasury yield, which has been bumping up against 4% lately. Piercing that level would be a yellow flag for FND stock, which turned modestly lower on Wednesday as Treasury yields rose.
FND Stock
FND stock dipped 0.4% in Wednesday afternoon stock market action. The slippage pulled FND stock back down to its 50-day line, after an earlier brush with that level last week.
If support holds, and FND stock manages to rally from its 50-day line, 92.61 — 10 cents above Monday's high and above its 21-day exponential moving average — could offer an early entry point.
The broader stock market also is at a key juncture, with the S&P 500 slipping below its 50-day line on Wednesday. The major indexes took a hit on Tuesday after hawkish testimony from Fed chair Jerome Powell led markets to price in higher odds of a 50-basis point rate hike at the coming meeting.
The higher the Fed hikes, the bigger the risk of a hard landing. The uncertainty suggests volatility ahead for FND stock
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