REAL CLIENT MANAGED PORTFOLIO MEMORANDUM
TO:
FROM:
SUBJECT:
DATE:
Real Client Managed Portfolio Spring 2014 Class
Shao-Lun Lu, Ying Jiang, Jiazi Cui.
Haverty Furniture Co., Inc (HVT) Investment Recommendation
May 1st, 2014
RECOMMENDATION: WATCH LIST
Macroeconomic and Industry Overview
The furniture industry is in the maturity stage and the competition in this industry is very fierce. And the
industry is related closely to real estate market. We found that, between 2012 and 2018, the real estate
investor confidence will keep growing. This is a positive signal. And the forecasts of private spending on
home improvement index and U.S. furniture & floor coverings market value also support our belief that in
the next 5 years, this industry’s performance will be positive. In 2020, the private spending on home
improvement index will increase by 60% comparing to that of 2012. And the average annual growth rate
for U.S. furniture & floor coverings market value for the next five years is 4.7%.
Company Overview
Haverty Furniture Companies, Inc (NYSE: HVT) is incorporated in Atlanta in 1885. It has 3266
employees and the market cap is 750 million dollars. Haverty’s main business can be divided into four
parts: living room furniture, bedroom furniture, dining furniture and mattresses. And the total revenue
from living room furniture takes the largest proportion, which is 55%. Its products are positioned as
fashion and in middle to upper-middle price ranges. The products are distributed to 80 cities in 16 states.
In 2013, its total revenue increased by 11.34%
.
Valuation
Comparable Companies Approach
Three competitors, Ethan Allen Interiors Inc. (ETH), Hooker Furniture Corporation (HOFT), and Bassett
Furniture Industries Inc. (BSET), are chosen. These three companies are all incorporated furniture
manufactures. Additionally, the products of Ethan Allen Interiors Inc. (ETH) are mainly on home
furniture and accessories that are very similar to product construction of Haverty Furniture Companies,
Inc. Therefore, we assign a higher weight (40%) on ETH and a lower weigh (30%) on both HOFT and
BSET. Meanwhile, Haverty Furniture Companies, Inc. is a manufactures company. So we choose P/E,
Forward P/E, EV/EBIT, EV/EBITDA, and EV/ Revenue to analyze the comparable valuation, and put the
same weight, each 20%. Finally, our price form comparable valuation is $ 29.05.
Discounted Cash Flow Analysis
Free cash flow will steadily increase overall in the future. This increase is not mainly from the top line
sales growth, but also the increase from profit margin due to focus on higher price point products .The
cost of equity, 11.75%, was determined by putting 90% weight on CAPM implied return on equity and
10% weight on annual realized returns for the past 3 years. Final discount rate of 12.45% was determined
after 1% risk premium adding to the WACC. Finally, DCF valuation indicated the implied share price of
$23.26 with the discount rate ,12.45% and terminal growth rate, 3%. Final price was decided by putting
50 and 50 percent equally on Comps and DCFs. The final price is 26.15 dollars per share.
Recommendation: Watch List
Based on our valuation , we recommend putting Haverty company on the watch list as its current price
of $25.24 is fairly priced now. Nevertheless, we suggest to keep an eye on its future performance if the
company is able to keep attracting affluent customers who are less price sensitive and if its revenue
growth and margin expansion can be higher than our expectation .