Fundamentals Matter. This Stock Is Poised for a Major Rally

In 2019, pre-Covid, carpet tile manufacturer Interface was posting all-time record results. The firm earned $1.58 per share that year and appeared ready to rumble higher. Virus-related, government-mandated shutdowns of businesses, schools and other customers of theirs put an end to that trend. EPS dipped to $1.14 during 2020 and fell to $0.94 in 2021. Sales and earnings are back on track now, however. Each quarter since Q4 2021 showed excellent year-over-year improvement. Q2 2022 (ended June 30) exceeded estimates. This year's EPS now appear on track to hit about $1.40, up almost 23% versus 2021. You'd have expected those nice profits to send TILE shares higher. Inexplicably, as of Aug. 5, 2022 the shares were down almost 10% from the previous day's closing quote. At one point TILE changed hands as low as $13 intraday. Even more amazingly, TILE is now available for less than it fetched exactly nine years earlier. Fundamentals shout that Interface has never been more valuable. The offering price is temporarily out of touch with TILE's true worth. Where should TILE really be selling for? Here is my own view plus those of three other well-respected research firms. From 2013 through 2021 TILE's normalized multiple ran about 17.5x with a lot of variation along the way. Assume just a partial reversion towards the mean valuation of 15 times this year's estimate and you'd come up with a six-month price target of $21. That implies almost 58% upside by January 2023. My goal is not farfetched. TILE topped out between $19.10 and $27.17 during each of the seven years from 2013 through 2019. EPS were often well below 2022's levels during most of those years. Yahoo Finance sees TILE reaching $19 by this time next year. If it only gets that high, and takes a full 12 months to reach $19, that would be a 42.7% gain. I'm calling their goal too conservative. It would only value TILE at 11.7 times their own 2023 EPS estimate. Independent research house Morningstar does not issue year-ahead targets. It does, though, let us know what they think is present-day fair value for each stock they cover. For TILE that value is $17.49, about 31.4% above its Aug. 5 quote. Morningstar labels TILE as a 5-star best buy, now that it fell below $14.10. Quantitatively based FastGraphs calls TILE's normalized P/E as 21.3x. That might be a bit aggressive right now so I only quote their end of 2022 and 2023 target prices at the default level of 15 times estimates. Using those more conservative multiples still suggest a six-month goal about 50% higher than the current price and an 18-month price target up almost 85%. We're all looking at the facts and coming up with much higher pricing than is currently in effect regarding Interface. All four opinions see TILE as significantly underpriced. Buy some shares to capture unlimited upside potential plus a minor yield while you wait for it to rebound. Option-minded traders might also wish to short some naked puts out to Jan. 20, 2023, the latest expiration now available. April series expirations will become available to trade not later than Aug. 23. Actual pricing on TILE's Jan. 2023 $12.50 and $15.00 strike price puts, with TILE at $13.32, are shown below. Worst-case, forced purchase prices dropped to either $11.45 or $12.55 versus an already bargain-priced quote. The 12-month chart below shows that owning these shares at the more conservative $11.45 break-even point would have been a winning position 100% of the time dating back more than a full year. TILE spent most of that 12 months hovering between $13 and $16 as EPS were improving from $0.94 to an estimated $1.40. Fundamentals tell us TILE is much more valuable today than when it changed hands at those much higher prices highlighted above. My guess is that TILE will reach $20 - $30 within six to 18 months. In today's inflationary world where else can you buy something, which has vastly increased in value, for less than it sold for a full nine years earlier? Buy some Interface shares, sell some puts or consider doing both.

Fundamentals Matter. This Stock Is Poised for a Major Rally

In today's inflationary world where else can you buy something, which has vastly increased in value, for less than it sold for nine years ago?

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