Sector financial performance:

This company, who is primarily flooring manufacturer including carpet, rugs, ceramic, tile, laminate, wood, stone, and vinyl, has been grouped into floor covering sector in furnishing industry.

It seems that demand in US market for soft surface flooring covering products has been weak in the past several years as indicated by decreasing sale volume of companies that have a focus on this type of products. Demand for hard surface products seem to be strong and has been the major driver of companies’ sales growth but the growth has been seen slowing. We thus have seen a significant decrease since 2016 in sales among soft surface product-focused companies and a bounce back in 2017 as they shift their products to hard surface products. The typical annual growth in sales is about 4%, 3.6%, -1.2% and 6% in2018, 2017, 2016 and 2015.

Companies’ gross margin seem improved in the past several years ( 31% in 2018) as cost of raw materials continued to decrease and price raised. The average SG&A as percentage of sales is about 22% and the operating margin is about 8% in 2018.

The typical stock Price/cash flow ratio: 21 (interest/EBI ratio of 7%).

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Company performance:

It seems that the demand for products of this company has been strong in the past three years as indicated by the growth in sales volumes, which are 1%, 1.3%, 5%, and 5% for 2018, 2017, 2016, and 2015 respectively. However the trend seems to be slowing down.

The first six months of fiscal 2018compared with the same period of 2017

Organic sales increased by about 3% attributable to 1% increases in volume and 2% increase in price/product mix.

 The fiscal 2017 compared with the 2016

Organic sales increased by about 3.3% attributable to 1.3% increases in volume and 2% increase in price/product mix.

Fiscal 2016 compared with 2015

Organic sales increased by about 5.5% attributable to 5.5% increases in volume.

Fiscal 2015 compared with 2014

Organic sales increased by about 5% attributable to 5% increases in volume.

Its gross margin has gone up from about 28% to 31% in 2018 primarily due to improvement in costs reduction and leveraging of expenses as sales increase. Due the decrease of 40 basis points in SG&A as percentage of sales, its operating margin has thus gone up from 10% to 13% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 20 ($190). We think that its stock is being relatively slightly undervalued considering that, while slowing down sales volume in the past two years, it is very competitive in hard surface floor covering market with its capacity.