Berkshire Hathawayit is (BRK.A 0.75%) (BRK.B 1.27%) Chairman and CEO Warren Buffett is an all-time great investor. During his career as an investor, the Oracle of Omaha turned a modest textile manufacturer into the most dominant holding company on the planet.
This success is the result of a focus on quality and a long-term investment mindset. And since his initial public offering (IPO) in 2017, the flooring retailer known as Floor and decoration backgrounds (NDF 2.73%) turned out to be a high quality company. This is precisely why Berkshire Hathaway owns a 4.5% stake in the company worth approximately $327 million. Here’s why the company could be an attractive choice for a growing investor’s portfolio.
A growing footprint in a massive market
Whereas Home deposit (HD 0.90%) and Lowe’s (DOWN 1.30%) dedicating its energy to home improvement retailing in every conceivable sales category, Floor & Decor focuses solely on the sale of floors. This approach earns the company the distinction of having the largest area of stores, design studios and warehouses dedicated to hard surface flooring – 18.2 million square feet in 2021.
Floor & Decor knows its market, and knows it well. The company makes use of its vast square footage by offering the widest selection of flooring accessories and tile, wood and stone floors in the industry. And Floor & Decor’s products are also sourced directly from manufacturers and quarries, giving it a price advantage over its competitors.
As a result, the company’s sales have compounded at 26% per year since its IPO. The number of Floor & Decor stores more than doubled from 83 in 2017 to 174 as of June 30. With just 8% of a $54 billion addressable market, Floor & Decor can probably grow its number of stores further.
As the retailer pushes to reach its long-term goal of 500 stores, sales are also expected to increase. That’s why analysts expect Floor & Decor to generate 23.2% annually non-GAAP (adjusted) diluted earnings per share (EPS) over the next five years.
A strong balance sheet can fund future growth
As important as it is for a business to have room for future growth potential, it means nothing if it doesn’t have the capital to execute growth plans. Fortunately, Floor & Decor can afford to expand its number of stores in the future.
Analysts expect the company’s debt to earnings before interest, taxes, depreciation and amortization (EBITDA) will be less than 0.2 in 2022. In other words, if the company chose to pay off its debt completely, it could do so in less than three months. For context, that’s much better than Home Depot’s debt-to-EBITDA ratio of 1.5 and Lowe’s debt-to-EBITDA ratio of 2. This gives Floor & Decor plenty of flexibility to grow its store count.
A winning company with an advantageous valuation
Floor & Decor is a great company. And with the stock price down 50% so far this year, the valuation is downright a steal.
Floor & Decor’s forward price-to-earnings (P/E) ratio of 21.4 is significantly higher than the home improvement industry’s average forward P/E ratio of 15.8. But the company’s premium is more than justified by its potential annual earnings growth of 23.2%, well above the home improvement industry average of 14.1%. On the contrary, Floor & Decor is expected to trade at a much higher valuation due to its growth profile.
Kody Kester held positions at Home Depot and Lowe’s. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares) and Home Depot. The Motley Fool recommends Lowe’s and recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short put options in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.