RH (NYSE:RH), better known as Restoration Hardware, was a high-flier from mid-2020 through mid-2021. During this timeframe, RH stock went from under $100 per share to prices nearing $750 per share. Since then, however, shares in the home furnishing retailer have been hit hard. At today’s prices, they’ve fallen by 56% from their high-water mark. This big decline has made it appealing to many bottom-fishers. As a result of the drop, it now trades at what appears to be a low valuation. That’s not all. The company plans to split the stock on a three-to-one basis. Many see this as a possible catalyst for shares.
Although stock splits do not create new inherent value, investors react favorably to them anyway. A lower share price can increase accessibility, resulting in more small investors diving in and bidding up the stock. With this in mind, is there merit in buying it today? Not so fast. At least, that’s the view of Louis Navellier, who last month argued why it’s not wise to buy it on its split plans alone. The split date is not yet known. It’s uncertain whether buying it now and flipping once the split happens will be a profitable trade.
You may be thinking, “okay, so the split really isn’t a catalyst for RH stock, but isn’t there merit in buying it as a value play?” While on paper it’s a cheap stock, investors haven’t erroneously pushed it down to a low earnings multiple. Given the risk of a potential slowdown in housing, and in turn, a possible slowdown in home furnishing, the market is heavily discounting its results for the coming year due to the uncertainty. That is why shares trade for 13.4x this year’s estimated earnings and 12.3x next year’s estimated earnings.
As seen in its last quarterly earnings report, management has already guided for a major deceleration of growth during this fiscal year. After seeing its sales soar 32% in 2021, it expects sales growth of just 5% to 7% this year. Analyst earnings forecasts call for a slight drop in earnings per share (EPS). Reporting EPS of $26.12 last year, this year’s average EPS estimate comes in at $25.68. For the following fiscal year ending January 2024, the sell-side forecasts high single-digit earnings growth. With this slowdown in growth, even if it meets expectations, it’s doubtful it’ll make a return to its past highs.
If it fails to meet these expectations, this seemingly cheap stock could become cheaper, falling further in tandem with its worsening fundamentals. Considering its limited upside if the “best case scenario” plays out and downside risk if an increasingly likely “worst case scenario” plays out, it’s best to hold off on RH stock.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
