Restoration Hardware Holdings Inc (NYSE:RH) announced Q2 earnings on September 10, and increased guidance in just about every notable metric. But after a 125% gain in 2013, is this stock presenting value, and is it still a good buy?
How’s it measure up?
On July 25, I wrote an article entitled ‘Which Stock Is Best in the Home Improvement Space ?,” which clearly showed the level of value in shares of Restoration Hardware Holdings Inc (NYSE:RH) compared to Lumber Liquidators Holdings Inc (NYSE:LL).
Both companies operate in the home improvement space but have different operational approaches. Restoration offers products for high-end consumers while Lumber Liquidators Holdings Inc (NYSE:LL) is primarily a floor company. Yet, due to stock performance, and industry, both are often compared.
Since my first article, Lumber Liquidators Holdings Inc (NYSE:LL) and Restoration Hardware Holdings Inc (NYSE:RH) have posted stock gains of 15%, and after Restoration’s recent quarter, the value is even more apparent. Take a look at a few key metrics that were used in the previous article, but with updated “full-year guidance” from the company’s Q2 report .
|Lumber Liquidators||Restoration Hardware|
|Revenue/ year-over-year Growth||$951 million/ 17 %||$1.57 billion/ 32%|
|Comparable Growth Guidance||High-Single/Low-Double Digits||26%|
|Market Cap||$2.96 billion||$2.77 billion|
|Price to 2013 Expected Sales||3.11||1.76|
|Forward P/E Ratio (2013 full-year)||42.64||43.4|
Lumber Liquidators Holdings Inc (NYSE:LL) and Restoration Hardware Holdings Inc (NYSE:RH) are fast-growing companies, but clearly, Restoration is growing faster and is priced cheaper.
With 32% expected top-line growth, and a price to 2013 sales of only 1.76, the comparison really ends. In theory, two companies in the same industry share a similar valuation if growth is comparable. When one company has greater growth, the market awards a higher valuation compared to the fundamentals, as expectations become higher.
In the case of Lumber Liquidators Holdings Inc (NYSE:LL) and Restoration Hardware Holdings Inc (NYSE:RH), this is simply not the case. Restoration should be awarded the higher valuation, and has proven quarter-after-quarter that its growth is nowhere near ending. In fact, Restoration has increased guidance in each quarter since becoming public last year, and in an economy with somewhat stagnant growth, Restoration is a rare performer.
Irrational behavior means what?
Surprisingly, after Restoration Hardware’s impressive Q2, where revenue grew 30% year over year, shares fell 4% in afterhours to $73. This performance came despite a quarter where comparable sales grew 26%, meaning the majority of revenue growth came from existing stores. In the quarter, Chairman and Co-CEO Gary Friedman conveniently notes that Restoration’s comparable growth from 2011-2013 has been 17%, 31% and now 26%, thus showing continued strength.
Now, it is very difficult to determine why Restoration’s stock fell lower, but looking ahead, it doesn’t really matter. In the long run, if a company does good, its stock usually follows, thus we can label Restoration’s current performance as irrational behavior in the market.