For investors aiming to construct a portfolio using value investing principles, the central method involves finding companies trading below their inherent value. This strategy, established by Benjamin Graham and notably used by Warren Buffett, demands a strict focus on financial condition, earnings power, and a margin of safety. A useful method to use this thinking is by filtering for stocks that display good fundamental traits, solid profitability, sound financial condition, and acceptable growth, while being valued lower than similar companies and the wider market. This mix points to a possible undervaluation, where the market price might not yet account for the basic business strength.
HNI CORP (NYSE:HNI), a supplier of office furniture and home building materials, comes forward as a prospect from such a strict filter. The company’s fundamental report, which you can examine fully here, describes a business with good finances and earnings that seems to be available at a good price.
Valuation: The Basis of Potential
For a value investor, a good price is the main starting point. It signifies the possible "margin of safety" that guards against mistakes in study or unexpected market declines. HNI’s valuation numbers are notable as especially interesting when measured against both its sector and the wider market.
- Price-to-Earnings (P/E): HNI’s P/E ratio of 14.60 is much lower than 82.5% of similar companies in the Commercial Services & Supplies sector, where the average P/E is above 57. It also trades much lower than the S&P 500’s current average of 27.67.
- Forward P/E: Looking forward, the view stays good. With a forward P/E of 12.53, the company is priced lower than 85% of its sector rivals.
- Other Multiples: The appeal continues with other valuation tools. HNI’s Enterprise Value to EBITDA ratio is lower than over 76% of the sector, and its Price-to-Free Cash Flow ratio is lower than 86.25% of peers.
This group of data shows the market is valuing HNI cautiously, possibly missing the strength of its main business activities, a typical situation value investors look for.
Financial Health: A Base of Steadiness
A low-priced stock is only a sound investment if the company is in good financial shape. Value investing stresses the need for a firm balance sheet to endure economic shifts. HNI’s financial health score of 7 out of 10 shows this steadiness.
- Good Solvency: The company shows very good solvency, with a low Debt-to-Free Cash Flow ratio of 1.80, meaning it could pay off all its debt in less than two years using its cash flow. This is better than 82.5% of the sector.
- Controlled Leverage: A Debt-to-Equity ratio of 0.40 shows the company does not depend too much on debt for funding.
- Overall Financial Condition: HNI has a firm Altman-Z score of 3.80, which points to a small short-term chance of financial trouble and is better than 76% of sector peers.
While liquidity measures like the Quick Ratio are seen as points of relative softness, the report finds that the company’s very good solvency and earnings power lessen major worries, offering a steady base for long-term owners.
Profitability: The Driver of Inherent Value
A company’s capacity to produce earnings regularly is what finally pushes its inherent value. HNI gets an 8 out of 10 for profitability, showing it is not only a steady business, but a very productive one.
- Good Returns: The company achieves very good returns on its capital. Its Return on Invested Capital (ROIC) of 12.16% puts it in the top group of its sector, doing better than 81% of rivals. Return on Equity (ROE) of 16.94% is also good.
- Sound and Getting Better Margins: HNI keeps sound margins, with a Gross Margin of 41.49% that beats 72.5% of peers. Significantly, its Profit Margin, Operating Margin, and Gross Margin have all gotten better in recent years, a signal of effective operations.
This steady and improving earnings power is key for value investors, as it supports the idea that the business is basically worth more than its present stock price indicates.
Growth and Dividend: Future Outlook and Owner Returns
While strict value stocks can sometimes show little growth, HNI shows a mixed profile. Its growth score of 6 is joined by a good dividend score of 8, providing both future possibility and present income.
- Quickening Growth Forecasts: After a time of small past growth, analysts predict a marked quickening. Earnings Per Share (EPS) are expected to increase at an average rate of 18.06% each year, and Revenue is predicted to rise by almost 35%.
- Dependable Income Source: For income-focused value investors, HNI’s dividend is a main draw. With a yield of 2.87%, it is much higher than both the sector average (0.83%) and the current S&P 500 yield. The company has a dependable 10-year history of paying and not lowering its dividend.
The mix of quickening expected growth and a reliable dividend forms an interesting total-return possibility, where investors receive payment while waiting for the market to acknowledge the company’s value.
Conclusion
HNI Corp. shows an example of using value investing filters. It is a company with clear good earnings power and financial health, traits that lower investment risk, yet it is valued at a noticeable discount to both its sector and the total market. The predicted quickening in growth and the owner-friendly dividend policy add more aspects to the investment case. For investors strict in the value method, HNI stands for the kind of basically sound business that can be bought at a price that gives a margin of safety.
This study of HNI came from a methodical search for "reasonable value" stocks. If you want to look into other companies that fit similar standards of fair valuation, firm profitability, health, and growth, you can find more outcomes using this set stock filter.
Disclaimer: This article is for information only and is not financial guidance, a suggestion, or a bid to buy or sell any security. Investing holds risk, including the possible loss of the original amount. You should do your own study and talk with a qualified financial consultant before making any investment choices.
