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RH Stock Climbs 7% as Buffett Discloses Stake

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In after-hours trading yesterday, RH (RH) stock was up about 7%, thanks to news of Warren Buffett’s new stake in the company. Berkshire Hathaway owns about 1.21 million RH shares, according to its latest 13F filing.

RH stock has outperformed broader markets and peers this year. The company’s stellar performance on all fronts has continued to drive it higher. As of yesterday, RH stock was up 46.2% year-to-date, while the S&P 500 had risen 23.5%, and Home Depot (HD) and Lowe’s (LOW) were up 37.7% and 24.0%, respectively.

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What drove RH stock higher?

RH’s robust revenue and EPS growth has boosted its stock. During the second quarter, its net revenue jumped about 10% and beat Wall Street’s expectations. The robust performance of new galleries, primarily RH New York, supported its sales growth. Higher outlet sales, fewer returns, and efficient shipping also boosted its top line.

In comparison, lower lumber prices and weather-related challenges have continued to take a toll on Home Depot’s and Lowe’s sales. Home Depot has lowered its fiscal 2019 sales and comps guidance, citing lower lumber prices.

In the second quarter, RH’s adjusted EPS rose about 59% YoY, beating analysts’ estimate. The company’s stronger sales and margins and share repurchases drove its robust bottom-line growth.

Why RH stock looks attractive despite near-term challenges

In the third quarter, RH’s sales and margins could stay pressured. Management expects the planned exit from its underperforming businesses and distribution center closures to hurt its third-quarter sales. It foresees margins staying weak due to soft sales and higher advertising costs.

Despite the short-term hiccup, RH remains on track to post strong sales and earnings growth in the long run. The company has raised its fiscal 2019 adjusted revenue outlook, to $2.680 billion–$2.694 billion from $2.658 billion–$2.674 billion, and its adjusted EPS forecast, to $10.53–$10.76 from $9.08–$9.52.

Analysts foresee RH’s sales and earnings growth slowing sequentially. However, despite that slowdown, the company’s revenue and EPS could continue to grow steadily in fiscal 2020.

Valuation looks compelling

RH stock’s low valuation and high growth make it an attractive investment. RH’s forward PE multiple is 15.1x, lower than Home Depot’s and Lowe’s PE multiples of 22.4x and 18.3x. Analysts expect RH’s adjusted EPS to rise by about 27% in fiscal 2019 and 14% in fiscal 2020, also making the stock attractive.

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