Berkshire Hathaway's (NYSE: BRK.A)(NYSE: BRK.B) chairman and chief executive officer Warren Buffett is an all-time great investor. During his investing career, the Oracle of Omaha has built 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 investing mindset. And since its initial public offering (IPO) in 2017, the flooring retailer known as Floor & Decor Holdings (NYSE: FND) has proven itself to be a high quality business. 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 interesting pick for the portfolio of a growth investor.
A growing footprint in a massive market
Whereas Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) devote energy toward home improvement retail in every imaginable sales category, Floor & Decor focuses solely on the sale of floors. This approach earns the company the distinction of having the most square footage of stores, design studios, and warehouses dedicated to hard-surface flooring-- 18.2 million square feet in 2021.
Floor & Decor knows its market, and it knows it well. The company makes use of its expansive square footage by offering the most extensive 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, which gives it a price advantage over its competitors.
As a result, the company's sales have compounded at 26% annually since its IPO. Floor & Decor's store count more than doubled from 83 in 2017 to 174 as of June 30. With just an 8% share of a $54 billion addressable market, Floor & Decor can likely grow its store count further.
As the retailer works to reach its long-term target of 500 stores, sales should zoom higher as well. This is why analysts are anticipating that Floor & Decor will deliver 23.2% annual non-GAAP (adjusted) diluted earnings per share (EPS) growth through the next five years.
Image source: The Motley Fool.
The strong balance sheet can fund future growth
As important as it is for a company to have room for future growth potential, that means nothing if it doesn't have the capital to execute growth plans. Fortunately, Floor & Decor can afford to build on its store count moving forward.
Analysts expect that the company's debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio will be less than 0.2 in 2022. That is, if the company chose to completely pay off its debt, it could do so in less than three months. For context, this is 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 increase its store count.
A winning business at a bargain-bin valuation
Floor & Decor is a tremendous company. And with the stock price down 50% so far this year, the valuation is a downright steal.
Floor & Decor's forward price-to-earnings (P/E) ratio of 21.4 is significantly above the home improvement retail industry average forward P/E ratio of 15.8. But the company's premium is more than justified by its 23.2% annual earnings growth potential, which is far more than the home improvement retail industry average of 14.1%. If anything, Floor & Decor should be trading at a much higher valuation because of its growth profile.
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Kody Kester has positions in Home Depot and Lowe's. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Home Depot. The Motley Fool recommends Lowe's and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
