Stifel Offers Industry Outlook for 2019
St. Louis, MO, January 9, 2019-The analyst Stifel has released a statement about the anticipated state of the industry in 2019,
“We have heard about weak retail traffic during the fourth quarter and as such are adjusting some of our estimates for our flooring companies. No doubt macroeconomic factors including the Fed talk, weaker housing data and a trade war with China, combined to cause about a 12% decline in the stock market since the beginning of the October, which in turn, likely have impacted the consumer. Many manufacturers that import flooring from China increased inventory during the fourth quarter ahead of the threatened 25% tariff on China goods beginning in 2019. This could lead to some pressure on domestically produced goods early in 2019. Input costs, however, should see a benefit in 2019 as oil and other inputs have come down along with the stock market. We give our thoughts on the flooring industry on the following pages.
“The stocks of flooring companies were hit hard in 2018 with the average decline of the year at about 48% for the six flooring companies we cover. This compares to a decline of just 6.2% for the S&P 500. Most of the drop has come from valuation compression as the trailing EV/EBITDA fell on average by 44% for these companies. These stocks have rallied in 2019 so far rising almost 11% on average compared to a 3% increase in the S&P 500.
“These companies faced many headwinds in 2018 namely inflation, rising mortgage rates, the negative headlines for housing, and the threat of tariffs on China imports. The rally we mention above has been helped by the Fed stating it would be more patient (mortgage rates began to fall slightly towards to end of 2018). Also helping the flooring companies are easing cost pressures helped by the decline in oil. Finally, the delay of the incremental 15% tariff (to 25%) on China imports for 90 days helped those names that source product from China, most notably Floor & Decor and Lumber Liquidators.
“While there may be a better outlook longer term for our flooring companies as it relates to the headwinds the stocks faced in 2018, our channel checks indicated some weakness in the fourth quarter. As such we have cut some of our fourth quarter estimates and some 2019 estimates based on demand outlook in the U.S. and around the globe. We are becoming more constructive on some names considering the massive pullback and will be monitoring them as we get more data points. In short, we think the flooring stocks have discounted a recession and we still don't see a material slowdown on the horizon.”