Ethan Allen Shares Popped: What You Need to Know (ETH)

Ethan Allen Shares Popped: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of home furnishings manufacturer and retailer Ethan Allen (NYSE: ETH ) rallied as much as 10% earlier in the trading session after receiving an upgrade from KeyBanc Capital.

So what: KeyBanc upgraded Ethan Allen from underweight to hold, and based on its recent earnings history, it’s not hard to see why. In the second quarter, Ethan Allen blew past consensus estimates of $0.09 and reported a profit of $0.51 and raised its 2011 guidance. The company also alluded to an increase in consumer traffic during the first two weeks of January.

Now what: More important than any short-term upgrade are the figures behind the upgrade. None of those figures excited me more than the large gross margin increase. Last quarter Ethan Allen’s gross margins rose to 51.8% from 48.2% year over year. Although this is encouraging, we also need to understand the majority of this increase came from cost-cutting either through manufacturing consolidation or job elimination. I’m not trying to take away from Ethan Allen’s stellar results of late by any means, but I’d rather see growth on the top line before diving into a company like this. I’d personally wait until after the next earnings report before making up my mind.

Interested in more info on Ethan Allen? Add it to your watchlist by clicking here.

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Fool contributor Sean Williams does not own shares in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong.

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