EDITOR’S NOTE: due to incorrect information on MarketBeat, an earlier version of this article incorrectly stated that the value of the share purchase was £2m rather than £19k.
There’s nothing quite like a company insider putting their money where their mouth is, and that’s exactly what happened with the recent news of a £19k purchase of this FTSE 250 stock by a board member.
Gill Barr, a non-executive director at DFS Furniture (LSE:DFS), bought 15,557 shares of the retailer’s shares on 21 April, according to a filing with the Financial Conduct Authority (FCA).
The legendary American investor Peter Lynch once said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise”.
That bullish sentiment is echoed by analysts following the stock. The average 12-month price forecast for DFS shares suggests a 45% upside, based on six analysts’ coverage.
Does that make the stock a red-hot ‘buy’ for my portfolio?
Armchair critic
Let’s start with the bear case for the furniture store chain.
DFS reported that pre-tax profit had fallen by a whopping 70% in the first half of fiscal 2023.
The company blamed that steep drop, from £22.8m to £6.8m, on inflationary pressures – as well as, more encouragingly, investments to support growth.
With UK inflation coming in at 11.6% in March, the average consumer is feeling squeezed. That could translate into further pressure on the bottom line.
After all, buying a brand-new sofa is seldom urgent or necessary. If you were really strapped for cash, you could look online for used furniture, or you could tolerate that tatty sofa you already have for a year longer.
The price is right?
Regardless of the doomy backdrop, DFS might still be a good buy, as long as it is priced appropriately.
The company has an enterprise value to EBITDA ratio of 5.2. A rule of thumb for this metric is that anything below 10 is considered good.
Comparing with five businesses also in the consumer durables segment, I found DFS to be the best valued of them all.
| Company | Enterprise value to EBITDA | Debt-to-equity ratio | Description |
|---|---|---|---|
| Churchill China | 12.9 | 0.84 | Pottery |
| Leggett & Platt | 9.36 | 1.39 | Bedding |
| Procook Group | 8.95 | 3.41 | Catering utensils |
| Victoria | 6.85 | 3.6 | Flooring |
| Sanderson Group | 6.36 | 0.07 | Wallpaper |
| DFS | 5.16 | 2.55 | Sofas and more |
However, DFS’ debt-to-equity ratio raises a red flag for me, especially as we move into a higher interest rate environment. Any number above two for this metric is usually considered risky.
Sitting on the edge of my seat
While DFS saw its sales drop 2.1% in the first half of the fiscal year, the UK upholstery market receded even more.
In other words, DFS outperformed its competitors, claiming a bigger slice of the (shrinking) pie.
That is encouraging in my eyes because it suggests the company’s recent misfortune has simply been due to rotten macroeconomic conditions, as opposed to mismanagement.
At the same time, the company is investing in the future: refurbishing showrooms, expanding its digital sales channels, and looking for opportunities beyond the upholstery market.
All in all, DFS has a tantalising combination of insider buying, a growing market share, and a relatively low price tag.
Still, I’m not going to buy shares as I’m put off by the company’s relatively high debt-to-equity ratio.
