Legendary investor Warren Buffet has been active over the past few months, surprising Berkshire Hathaway (BRK.A 0.80%) (BRK.B 0.24%) followers with his significant stake in Activision Blizzard (ATVI +0.00%), initiating new positions in names like Citigroup (C 2.55%) and Paramount Global (PARA +0.00%) (PARA.A +0.00%), and significantly increasing positions like Formula One Group (FWON.A +0.01%) (FWON.K +0.15%) and Floor & Decor (FND 3.85%).
We're going to take a closer look at that last one. At first glance, Floor & Decor, trading at 23 times earnings, may not look like your textbook Buffett stock, but it's the one I am most bullish on today. Let's see why it may have caught the Oracle of Omaha's eye.
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A wonderful company at a fair price
While Buffett is renowned as a value investor, he isn't opposed to buying a stake in a more expensively valued company if he thinks it is a great business. In fact, he is well-known for stating that it is "Far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
This philosophy has served him well as some of his largest holdings like Apple (AAPL 0.95%) and Coca-Cola (KO +0.04%) have not traded at "cheap" valuations for many years, but they have helped to drive enormous returns for his portfolio. Floor & Decor looks like it could be the next stock to fit his "wonderful company at a fair price" criteria.
NYSE: FND
Key Data Points
Why is Floor & Decor wonderful?
The Atlanta-based company is demonstrating that it is a wonderful business, and Buffett seems to agree, as he has increased his stake in it by 460% over the past quarter. Floor & Decor has grown its revenue at a 25% compound annual rate over the past five years. It has also grown earnings per share by an impressive 37% rate over the same period.
It has also grown its store count by 17.8% on an annualized basis over the past five years, and has a goal of more than tripling its current store count to 500 over the next few years. Even though the company is expanding rapidly, it is still keeping its eye on the ball at its existing locations. Same-store sales growth, which measures revenue for locations that have been open for more than a year, has increased for 13 straight years.
Floor & Decor is differentiated from its peers by the fact that it is laser-focused on hard flooring options such as tile, stone, wood, and laminate. That specialization, combined with the large size of its showrooms (they average 78,000 square feet) makes it a go-to destination for anyone looking for new flooring.
The company's business model also stands out because it cuts out middlemen and goes directly to sources and suppliers all over the world, giving its customers a unique range of selections at advantageous prices. The company is also increasing its presence in design services and is expanding its reach with professional contractors.
Is the fair price now a wonderful price?
Floor & Decor trades at 23 times earnings, which is above average compared to the broader market, but its earnings multiple is expected to come down to 16.5 next year as earnings are projected to increase. Looking at its price-to-earnings-growth (PEG) ratio -- a measure popularized by another legendary investor, Peter Lynch -- Floor & Decor is valued attractively at a PEG ratio of less than 1.0. A stock with a PEG ratio under 1.0 is generally considered to be undervalued.
Be like Buffett and buy Floor & Decor
Buffett is clearly a fan of Floor & Decor, based on his growing stake in the company. Berkshire Hathaway now owns almost 5% of the shares outstanding. He likely sees Floor & Decor's 13 straight years of same-store sales growth, coupled with its prodigious store count growth, as evidence that the company can execute on its plan of reaching 500 locations while doing so profitably.
He's likely also impressed by the retailer's revenue and earnings growth over the past five years, and sees the current sell-off as an opportunity to buy more of a high-quality company that should be worth a lot more over the long term.
The shares are now down 56% from their 52-week high, which gives investors a chance to add this Buffett-approved name to their portfolios at a discount. Floor & Decor looks like the next in Buffett's line of long-term winners, and it can be a successful investment for your portfolio too.
