Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Restoration Hardware Holdings Inc (RH): Is This Momentum Stock Presenting Value?

Page 1 of 2

Restoration Hardware Holdings Inc (NYSE:RH)In my article, “Top Value Stocks for the Next Six Months,” I included Restoration Hardware Holdings Inc (NYSE:RH) as a top “value” pick. Immediately, I received several comments, explaining that I should revisit the rules of value investing, and that Restoration Hardware Holdings Inc (NYSE:RH) at 37 times next year’s earnings could not possibly be a value investment – or is it?

Value Explained!

There is a belief among retail investors that in order for a stock to be considered a value investment it must meet generalized criteria, those that you could identify on a stock screener. One of the most popular metrics among retail investors is the P/E ratio, which compares a company’s market capitalization to its net income. While I have heard many “rules” regarding a P/E ratio, most retail value investors would like to think that a stock trading over 20 times earnings could not possibly present value – or could it?

In my book “Taking Charge With Value Investing (McGraw-Hill, 2013)” I worked very hard to attack many of these psychological notions of value. Based on my research, most of these myths of value are determined by investors who believe that there is an actual formula for value investing that they can adhere to and be successful.

In my book, I explain that generalizing a P/E ratio, price/sales ratio, or a price/book ratio are all worthless in a widespread setting. Instead, I suggest breaking away from these notions, and relying more on a stock’s comparison to its peers as an indication of value. This strategy is what leads me to my conclusion that regardless of stock performance, a stock can still present value, much like Restoration Hardware.

Compare To Find Value

In an attempt to determine whether a stock is presenting value, we need to compare it to its peers, not the overall market. Thus, let’s see how Restoration Hardware Holdings Inc (NYSE:RH) compares to its larger peers.

Restoration Hardware The Home Depot, Inc. (NYSE:HD) Lowe’s Companies, Inc. (NYSE:LOW)
Market Cap (billions) $2.7 $117.3 $47.3
Price/Sales 2.09 1.55 0.93
Revenue Growth (last quarter) 38.3% 7.4% (0.5%)
Forward P/E Ratio 37 18.85 17.43
Operating Margin 3.87% 10.89% 7.29%

The first thing to notice is that Restoration Hardware Holdings Inc (NYSE:RH) is at a different stage in its business versus The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW). Restoration Hardware is a growth company, while Home Depot and Lowe’s are more cyclical in nature. This alone changes the typical valuing metrics, as growth companies are awarded larger valuations versus those that replicate GDP in growth.

Nonetheless, The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW) set the standard for valuing such companies in the space, and both trade with metrics that are greater than the S&P 500. With that said, Lowe’s and Home Depot have $125 billion in combined revenue; Restoration Hardware Holdings Inc (NYSE:RH) has revenue of just $1.3 billion; this leaves a significant amount of room to grow for Restoration Hardware.

The next metric to look at is price/sales, and its relevance to growth. First, The Home Depot, Inc. (NYSE:HD) is more expensive than Lowe’s Companies, Inc. (NYSE:LOW). However, Home Depot is also producing top-line growth, while Lowe’s is not. Therefore, The Home Depot, Inc. (NYSE:HD) trades at a premium to Lowe’s.

Page 1 of 2
Loading Comments...