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Strong First-Quarter Earnings Drive Williams-Sonoma’s Valuation

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Aug. 18 2020, Updated 10:24 a.m. ET

Valuation multiple

Valuation multiples help investors compare companies with similar business models. We’ve opted for the forward PE (price-to-earnings) multiple due to the high visibility in Williams-Sonoma’s (WSM) earnings. The forward PE multiple is calculated by dividing the company’s current stock price with analysts’ EPS estimates for the next four quarters.

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Forward PE multiple

The strong first-quarter earnings and raising of revenue and EPS guidance for 2018 appear to have increased investors confidence, leading to a rise in WSM’s stock price and valuation multiple. As of May 24, WSM was trading at a forward PE multiple of 12.1x compared to 11.2x before the announcement of first-quarter earnings

From the above graph, we can see that WSM is trading below its peers’ median valuation multiple. On the same day, its peers Home Depot (HD), Lowe’s Companies (LOW), and Bed Bath & Beyond (BBBY) were trading at a forward PE multiple of 19.4x, 16.7x, and 8.1x, respectively.

Growth prospects

To drive sales, WSM is focusing on digital leadership, product innovation, retail transformation, and operational excellence. All these initiatives are expected to increase the company’s expenses. If these initiatives fail to generate expected sales, the increased costs are expected to pressure the company’s future earnings.

For the next four quarters, analysts expect WSM’s EPS to rise 12.3%, which appears to have been incorporated into the company’s current stock price. If the company posts earnings lower than analysts’ estimates, the selling pressure could bring the company’s stock price and valuation multiple down.

Next in this series, we’ll look at analysts’ recommendations.

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