The Tile Shop Holdings (TTSH) is a leading specialty retailer of manufactured and natural stone tiles, setting, and maintenance materials. It currently operates 143 stores in 31 states and the District of Columbia.

TTSH’s business staged an impressive turnaround during the pandemic. While many industries struggled, one sector that boomed was people spending money on upgrading their homes. Additionally, the housing sector was strong as the pandemic led many people to move out of urban areas and into rural and suburban areas. All of these factors led to a boom for TTSH.

Its stock price climbed from under $1 to nearly $10. Quarterly revenues went from $68 million to $98 million, margins improved, and the company also experienced an earnings turnaround. Despite these improving fundamentals, TTSH’s stock price has essentially been flat over the last 8 months and is down by 15% over the last four months due to concerns about a housing slowdown and the overall economy weakening. 

However, investors should use this weakness to scoop up TTSH as it continues to have much more upside. Read on to find out why… 

Company Background

TTSH was founded in 1985 with one location to bring home decor ideas to the public and help improve people’s indoor and outdoor living spaces. Currently, TTSH has more than 140 locations and sells a variety of high-quality tile products, natural stone, and consulting services. 

Clearly, TTSH’s business is driven by the housing cycle. When home prices are rising, people are more likely to spend money on renovating or upgrading their homes. Additionally, people are more likely to make such cosmetic improvements after buying a home or before selling it. 

Recently, the company has invested in technology to help customers visualize how different tiles, stones, and various patterns would look like in their homes. TTSH has also expanded into offering more, higher-margin products that complement new floors with molding, artwork, or decor items.

Growth

TTSH has an impressive growth story at the micro and macro level. TTSH’s last earnings report showed that the company is in the midst of an impressive turnaround as revenue increased by 41% and earnings jumped by 803%. Strong demand also led to increasing pricing power, and the company had a record backlog as it was unable to process all its orders.

However, TTSH’s more macro growth story may be even more impressive. The housing market experienced a slowdown over the past few months after being hot for much of 2020 and the early parts of 2021. The latest housing data is showing that home sales are rising along with home prices, once again.

And, we should expect home prices to keep rising over the next few years as housing inventory is quite low, while the US faces a demographic bulge with Millennials entering their peak consumption years. On the demand side, low rates are helping keep homes affordable, while high levels of household savings and low levels of leverage are also supportive of strong demand. 

Value

Usually, when looking at a growth stock with more than 800% earnings growth, there would be some sort of tradeoff in terms of high multiples. This isn’t the case with TTSH which has a forward P/E of 14 which is cheaper than the S&P 500’s forward P/E of 21 despite TTSH having much faster growth rates. 

Multiples are low relative to TTSH’s peers. One reason for this is that the company was close to bankruptcy a couple of years ago. However, this crisis has been avoided and we should expect multiples to normalize over the next few months which could be another tailwind for the stock price.

POWR Ratings 

Given this combination of growth and value, it’s not surprising that TTSH is rated an A according to the POWR Ratings which equates to a Strong Buy rating. A-rated stocks have posted an average annual performance of 30.7% which compares favorably to the S&P 500’s annual performance of 7.1%. 

The POWR Ratings also evaluates stocks by different components to give additional insight on each stock. Interestingly, TTSH has an A rating for Quality. This is especially noteworthy in the context of the company’s financial and operational turnaround over the past year. 

The POWR Ratings also provides component grades for other categories like Value, Growth, Stability, Sentiment, Industry, and Quality. To see TTSH’s POWR Ratings, click here. 

Putting It All Together

In doing my research on TTSH, one recent development caught my eye. For most of the last decade, TTSH has been an underperformer relative to the rest of the housing market. From mid-2017 to early-2020, the stock dropped from over $20 to under $1, while the broader market was essentially flat.

Now, the situation is much different as TTSH is demonstrating relative strength. Most housing stocks were down by 15 to 35% over the past few months, however, TTSH’s stock price was essentially flat, trading in a tight range of around $8. Recent housing data in addition to Q3 earnings could be the catalyst for TTSH to stage an upside breakout of this range.

TTSH shares were unchanged in premarket trading Friday. Year-to-date, TTSH has gained 81.86%, versus a 22.51% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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