Today let's take a closer look at Floor Decor Holdings, a consumer cyclical company whose shares shot up after management announced a positive earnings report. Accordingly, ts shares rose 13.5% to $92.92, taking the stock to within -2.5 of its average analyst target price of $95.26. FND outstripped the S&P 500 index by 13.5% today, but has lagged behind it by 16.7% over the last year, returning -23.1%.
Home improvement companies fall into the consumer cyclical segment. The cyclical aspect of these companies refers to the tendency of their sales -- and as a result, their stock price -- to correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary, i.e. non necessary, products. Companies such as Floor Decor Holdings may offer more growth potential than non-cyclical or defensive stocks, but at the expense of being more volatile.
Floor Decor Holdings s year on year (YOY) quarterly earnings are growing at a rate of 0.4% and its YOY quarterly revenues are increasing at a rate of 26.7%, which shows that the company's profit margins are widening. FND has gross profit margins of 40.7%, which indicates that it potentially benefits from a sustained competitive advantage over its peers, allowing it to maintain highly profitable pricing structures.
Companies have many other costs and sources of income occurring outside of its core business. Everything from equipment depreciation, returns on capital investments, legal costs, income from intellectual property, and interest payments on debt factor into the company's ultimate profitability.
We can see the effect of these additional factors in Floor Decor Holdings's levered free cash flow of $-510,656,128. A negative cash flow is common, even among successful companies. But FND's cash flows since 2018 seem to be on a negative trend which could indicate brewing financial issues for the company.
Floor Decor Holdings's trailing 12 month P/E ratio is 35.3, based on its trailing Eps of $2.63. The company has a forward P/E ratio of 26.2 according to its forward Eps of $3.55 -- which is an estimate of what its earnings will look like in the next quarter. Both of these numbers are higher than the historical S&P 500 average of 20. The company's price to book ratio is 6.6, which is also higher than the S&P 500 average, which stands at 4.5.
While FND has a strong growth and solid margins, it's value proposition is clouded by its negative cash flows and above average valuation compared to its earnings and book value. For many investors, however, the positive growth story is enough of a reason to buy the stock -- and this seems to be reflected in the company's price jump today. For more stock analysis delivered to you daily, subscribe to our free newsletter!
