Ethan Allen Stock: Great Buy At Current Levels (NYSE:ETD)

by decwells
Ethan Allen Stock: Great Buy At Current Levels (NYSE:ETD)


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Thesis

Ethan Allen Interiors Inc. (NYSE:NYSE:ETD) is a retail stock that we believe is vastly undervalued by the market and is a stock that can provide dividend income growth for investors. The company is financially strong with a formidable brand moat Based on dividend based valuation model and historical/peer valuation comparisons, the company is undervalued and we believe there is at least a minimum of 60% upside once market conditions normalize. In addition, Ethan Allen’s management has proven capable of navigating the company through a deep economic shock like the COVID-19 pandemic and should be liquid enough to withstand any further economic downturn.

Company Overview

Ethan Allen Interiors Inc. is an American interior design furniture company that manufactures and sells various interior design products such as couches, beds, dining tables and more. The company has more than 300 locations in the United States and abroad. Ethan Allen is known for his timeless designs and the ability to customize his furniture in his design centers. The company’s stock has outperformed the S&P 500 index so far this year, returning -7.38% compared to the S&P 500’s return of -14.39% in the same time frame.

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ETD Year to Date Price Returns (Daily) data by YCharts

Strong financial performance

Ethan Allen is a widely recognized interior design brand and has won numerous awards to demonstrate its popularity and trust among consumers. For example, Lifestory Research declared Ethan Allen the “most trusted brand among people buying furniture for their home” in 2022. Such titles place Ethan Allen well ahead of competitors such as Williams-Sonoma (WSM), Restoration Hardware (RH), and IKEA. Recent quarter performance reflects Ethan Allen’s strong business appetite, as the company reported quarterly sales year-over-year growth of 28.8% and EPS year-over-year growth of 73.2%. Such strong quarterly performance led management to declare an additional special cash dividend of $0.50 per share in addition to the regular quarterly cash dividend of $0.32 per share. Based on current levels, this translates to a dividend yield of 3.3% in the past quarter alone. We believe Ethan Allen’s 90-year brand history and consumer brand awareness serve as a strong moat that can continue to drive the company’s financial performance going forward. As one can see below, except for pandemic-related years in which stores were closed, the company’s revenue has generally trended upward in the past 10 years, and Ethan Allen was able to exceed pre-pandemic revenue this year.

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ETD data by YCharts

Valuation

We used a few valuation methods to determine whether the stock was undervalued or overvalued by the market. Based on any of the metrics, we find the company to be significantly undervalued from an intrinsic valuation standpoint as well as based on historical valuation, and we believe that the current share price presents an attractive opportunity for investors.

Gordon growth model

Excluding special cash dividends, the company currently pays $0.32 per share in quarterly dividends. Annualized, the annual dividend is $1.28 per share, representing an annualized yield of 5.26%. That’s more than 3 times the S&P 500’s dividend yield of 1.69%. Using half of Ethan Allen’s 5-year dividend growth CAGR of 10.52% and a discount rate of 8.26%, the Gordon Growth Model has an intrinsic valuation of $44.76 per share, representing an increase of 83 representing .8% of current levels. Given a low payout ratio of 29.26%, we believe the dividend growth assumption is conservative and the potential for higher dividend growth based on the company’s performance.

Sweet Minute Capital Appreciation

Sweet Minute Capital Appreciation

Historical and peer valuation

The company is currently valued well below the sector median valuation multiples (ie P/E, PEG, EV/Sales, etc.) as seen below. On certain measures like PEG GAAP (TTM) valuation measure, Ethan Allen is trading nearly -66.08% below current levels.

Look for alpha valuation statistics

Look for alpha valuation statistics

What is particularly notable is that the company is trading at historic valuation lows due to the market uncertainties. The company’s P/E ratio now hovers at ~6.0x although the company’s P/E ratio has fluctuated well between ~10.0x to 20.0x in the past 10 years. Using the lower end of this range estimate of 10.0x, based on the company’s TTM financial performance, we believe the company could well recover to 10.0x P/E multiple, offering ~66% upside from current levels .

Graph
ETD PE ratio data by YCharts

Risks

As a consumer discretionary company, the company is naturally exposed to the cyclical nature of the economy, particularly among US consumers. As the Federal Reserve raises rates and tightens monetary supply, there is a greater potential of a sharp economic recession and decline in consumer spending. However, we believe that Ethan Allen is well protected against these risks. Primarily, Ethan Allen sells expensive interior design products with some furniture selling for over $5,000. As a result, Ethan Allen caters more to high income earners than other consumer discretionary brands such as IKEA. There are reports that compared to low income households, higher income households will do better in an inflationary environment as they will have higher discretionary spending compared to low income households. Furthermore, the pandemic-driven recession should offer investors comfort in Ethan Allen’s ability to navigate an unprecedented slowdown in consumer spending. Even as Ethan Allen’s revenue fell in 2020 due to pandemic crashes, the company continued to pay out quarterly dividends, and the company bounced back stronger in terms of financial performance. Furthermore, the company has nearly $110 million in cash (~16% of market cap) as of last quarter, and we believe this should provide sufficient liquidity for the company to navigate through any steeper-than-expected recession.

Closure

Ethan Allen is an undervalued investment that we believe can offer ample dividend growth and value at current price levels. Offering upside of ~60% to ~80% based on intrinsic and historical valuation models, the company has strong brand grooves and balance sheet that can help the company navigate through potential economic turmoil. We believe Ethan Allen will make a good investment for long-term investors.

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1 comment

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