Ethan Allen Interiors has been consistently underestimated by the market despite its impressive economic profitability over the last five years. The market’s valuation of Ethan Allen suggests a decline in economic profitability, even as the company’s economic performance has accelerated.
Not only does the market hold an overly pessimistic view, but Ethan Allen also stands as a very safe source of dividend income, with the firm generating significantly more free cash flow than it pays out in dividends.
Business Model
Ethan Allen is a global, vertically integrated interior designer, manufacturer, and retailer specializing in home furnishings. The company operates across the entire value chain from product design to home delivery. Known for its high level of craftsmanship and personalized service, Ethan Allen offers a high-end and stylish user experience.
The company’s products are sold in the United States and internationally through its brick-and-mortar design centers and online store. These design centers include both independent licensees and company-operated locations.
As of June 30, 2023, Ethan Allen operated 139 retail design centers in North America, with 135 in the United States and four in Canada. The company also runs ten manufacturing facilities in the United States, Mexico, and Honduras.
With three-quarters of its products manufactured in North America, the firm collaborates with partners in Europe, Asia, and other regions to support its business.
Growth with Profitability
Between 2020 and the trailing twelve months (TTM), Ethan Allen’s revenue grew from $589.84 million to $664.96 million, compounding at an annual rate of 2.43%. However, to get a clearer picture of the firm’s profitability, it’s essential to consider net operating profit after tax (NOPAT), which excludes non-operating items and other material items off the financial statements.
Using this methodology, NOPAT rose from $11.99 million in 2020 to $67.97 million in the TTM, compounding at an impressive rate of 41.48% annually.
This increase in NOPAT was driven by rising NOPAT margins, which improved from 2.03% in 2020 to 10.22% in the TTM. Additionally, the company’s average invested capital turns (revenue/average invested capital), a measure of balance sheet efficiency, improved from 0.93 in 2020 to 1.01 in the TTM.
Ethan Allen’s Competitive Advantage and Rising ROIC
Long-term market valuations are influenced by returns on invested capital (ROIC). Using the methodology from New Constructs, I calculated that Ethan Allen’s ROIC rose from 1.89% in 2020 to 10.30% in the TTM, indicating a significant improvement in capital efficiency.
Ethan Allen’s rising NOPAT margins are crucial for maintaining its competitive edge against rivals such as Hooker Furnishings (HOFT), Bassett Furniture Industries (BSET), RH (RH), Haverty Furniture (HVT), and La-Z-Boy (LZB). This pricing power is a testament to its strong market position.
A Safe Source of Dividend Income
Ethan Allen’s free cash flow (FCF) grew from $11.99 million in 2020 to $24.07 million in the TTM, with a cumulative FCF of $326.49 million, compared to a market capitalization of $698.06 million. This means the company has generated 46.77% of its market capitalization in FCF.
The FCF yield (FCF/enterprise value) has also remained attractive, rising from 2.84% in 2020 to 3.02% in the TTM. The company has paid out $208.86 million in dividends during this period, indicating substantial room for future dividend increases, making it a very attractive option for dividend-seeking investors.
Attractive Valuation
Stock prices reflect expectations about future cash flow growth. A firm’s economic book value (EBV), analogous to its intrinsic value, represents the value of its cash flows based on current operations. Ethan Allen’s EBV per share has been significantly higher than its stock price since 2021, suggesting the market expects a decline in economic profitability.
However, the firm’s consistent NOPAT growth contradicts this pessimistic view, and the market’s expectations are beginning to adjust.
Reliable Dividend Payer
Ethan Allen Interiors is a straightforward business that has consistently been underestimated by the market. Despite modest revenue growth, the firm has significantly increased its NOPAT through improved NOPAT margins and capital efficiency. This has been reflected in a sharp rise in ROIC.
The company generates substantial FCF, making it a reliable source of dividend income. Given its attractive valuation and the market’s unfounded pessimism, Ethan Allen presents a compelling investment opportunity.
DISCLAIMER
You should read and understand this disclaimer in its entirety before joining or viewing the website or email/blog list of SmallCapStocks.com (the “Publisher”). The information (collectively the “Advertisement”) disseminated by email, text or other method by the Publisher including this publication is a paid commercial advertisement and should not be relied upon for making an investment decision or any other purpose. The Publisher is engaged in the business of marketing and advertising the securities of publicly traded companies in exchange for compensation. The track record, gains, upside, and/or losses mentioned in the Advertisement, if any, should not be considered as true or accurate or be the basis for an investment. The Publisher does not verify the accuracy or completeness of any information included in the Advertisement. While the Publisher does not charge for the SMS service, standard carrier message and data rates may apply. To unsubscribe from receiving promotional text messages to your phone sent via an autodialer, using your phone reply to the sender’s phone number with the word STOP or HELP for help.
The Advertisement is not a solicitation or recommendation to buy securities of the advertised company. An offer to buy or sell securities can be made only by a disclosure document that complies with applicable securities laws and only in the states or other jurisdictions in which the security is eligible for sale. The Advertisement is not a disclosure document. The Advertisement is only a favorable snapshot of unverified information about the advertised company. An investor considering purchasing the securities, should always do so only with the assistance of his legal, tax and investment advisors. Investors should review with his or her investment advisor, tax advisor or attorney, if and to the extent available, any information concerning a potential investment at the web sites of the U.S. Securities and Exchange Commission (the "SEC") at www.sec.gov; the Financial Industry Regulatory Authority (the "FINRA") at www.FINRA.org, and relevant State Securities Administrator website and the OTC Markets website at www.otcmarkets.com. The Publisher cautions investors to read the SEC advisory to investors concerning Internet Stock Fraud at www.sec.gov/consumer/cyberfr.htm, as well as related information published by the FINRA on how to invest carefully. Investors are responsible for verifying all information in the Advertisement. As an advertiser, we do not verify any information we publish. The Advertisement should not be considered true or complete.
The Publisher does not offer investment advice or analysis, and the Publisher further urges you to consult your own independent tax, business, financial and investment advisors concerning any investment you make in securities particularly those quoted on the OTC Markets. Investing in securities is highly speculative and carries an extremely high degree of risk. You could lose your entire investment if you invest in any company mentioned in the Advertisement. You acknowledge that we are not an investment advisory service, a broker-dealer or an investment adviser and we are not qualified to act as such. You acknowledge that you will consult with your own independent, tax, financial and/or legal advisers regarding any decisions as to any company mentioned here. We have not determined if the Advertisement is accurate, correct or truthful. The Advertisement is compiled from publicly available information, which include, but are not limited to, no cost online research, magazines, newspapers, reports filed with the SEC or information furnished by way of press releases. Because all information relied upon by us in preparing an advertisement about an issuer comes from a public source, it is not reliable, and you should not assume it is accurate or complete.
By your subscription to our profiles, the viewing of this profile and/or use of our website, you have agreed and acknowledged the terms of our full disclaimer and privacy policy which can be viewed at the following link: www.SmallCapStocks.com/Disclaimer and www.SmallCapStocks.com/Privacy-Policy
By accepting the Advertisement, you agree and acknowledge that any hyperlinks to the website of (1) a client company, (2) the party issuing or preparing the information for the company, or (3) other information contained in the Advertisement is provided only for your reference and convenience. The advertiser is not responsible for the accuracy or reliability of these external sites, nor is it responsible for the content, opinions, products or other materials on external sites or information sources. If you use, act upon or make decisions in reliance on information contained in any disseminated report/release or any hyperlink, you do so at your own risk and agree to hold us, our officers, directors, shareholders, affiliates and agents harmless. You acknowledge that you are not relying on the Publisher, and we are not liable for, any actions taken by you based on any information contained in any disseminated email or hyperlink.
Joel Gbolade is a seasoned financial writer with over seven years of experience in freelance content creation. Specializing in the financial niche and stock market, he has crafted engaging content for numerous websites. His background in technology extends to data processing and computer proficiency, enriching his comprehensive skill set in the financial realm.
