How Does Hooker Furniture’s (NASDAQ:HOFT) P/E Compare To Its Industry, After Its


Hooker Furniture (NASDAQ:HOFT) shareholders are no doubt pleased to see that the share price has had a great month, posting a 32% gain, recovering from prior weakness. But shareholders may not all be feeling jubilant, since the share price is still down 32% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for Hooker Furniture

Does Hooker Furniture Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 12.41 that there is some investor optimism about Hooker Furniture. As you can see below, Hooker Furniture has a higher P/E than the average company (10.8) in the consumer durables industry.

NasdaqGS:HOFT Price Estimation Relative to Market June 5th 2020
NasdaqGS:HOFT Price Estimation Relative to Market June 5th 2020

Its relatively high P/E ratio indicates that Hooker Furniture shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the ‘E’ decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Hooker Furniture saw earnings per share decrease by 57% last year. But it has grown its earnings per share by 4.3% per year over the last five years. And over the longer term (3 years) earnings per share have decreased 13% annually. This might lead to low expectations.

Remember: P/E Ratios Don’t Consider The Balance Sheet

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Hooker Furniture’s Balance Sheet

Hooker Furniture has net cash of US$5.9m. That should lead to a higher P/E than if it did have debt, because its strong…



Read MoreHow Does Hooker Furniture’s (NASDAQ:HOFT) P/E Compare To Its Industry, After Its

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