Sorry, It's All Baked In

 | Mar 12, 2013 | 9:30 AM EDT
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When you think of Ethan Allen (ETH), you might think of Ethan Allen and the Green Mountain Boys who captured Fort Ticonderoga in 1775 while the British were sleeping. Or, perhaps, you might think of the furniture maker whose shares just made a five-year high Monday. The stock is back to its pre-Great Recession level -- up 8% year to date, with the momentum hounds nipping at its heels. What's going on?

Ethan Allen reported a mixed quarter at the end of January. Although the company beat the consensus estimate by $0.01, Hurricane Sandy really took some momentum out of its sales -- revenue rose 4.4% to $191.3 million, in line with estimates, and many were disappointed with the weak operating margins. In the fiscal first quarter (ended September), the company was able to grow operating margins 300 basis points, and guidance for the December quarter pointed to more of the same. But Ethan Allen only delivered 110 bps. If not for the lower tax rate, it would have missed the quarter.

The bulls overlooked the mixed results and bought the shares on the thesis that an improving housing market would carry the stock higher. So far, they are right. But if you take a closer look, the bullish housing thesis has a long way to go.

During the 2006 peak for both housing and the stock market, the U.S. had completed 1.979 million housing units. Today, the most bullish forecasters think we can build 1.2 million units in 2013, with the overall consensus calling for around 1 million. We would need an 85% increase in home completions to reach the bulls' goal, as we only built 650,000 homes in 2012.

Ethan Allen is currently trading for around $30. In 2005, the U.S. was building 1.9 million units, yet Ethan Allen stock was only in the low $30s, and it took the 2006 housing bubble to push the stock to $45.

In other words, 1.2 million housing units for 2013 looks already baked into the stock price. Getting the stock into the mid-$30s would take something like 1.5 million units, and that isn't likely to happen until 2014 or 2015. Right now the stock is riding a wave of market momentum. Don't be surprised when Ethan Allen storms the fort with a big correction and wakes up the sleeping bulls.

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