Ethan Allen Sags

A Tumble May Lie Ahead
Ethan Allen Interiors (ETH ) is probably the best-run furniture designer and maker -- remaining profitable while many competitors are struggling just to keep above water. But deteriorating industry fundamentals fueled by low-cost, high-quality furniture imports threaten to crimp company expansion. "We expect Ethan Allen's growth rate to decelerate and its price-earnings multiple to contract," warns Robert Plaza of Zacks Equity Research, mainly because of global overcapacity and price deflation in the industry. That has forced Ethan to reduce prices to retain its market share. And rising interest rates could hurt housing starts -- and furniture sales. So he rates the stock a "sell" since he expects it to tumble in six months, from its current price of 34 to 28, or 14 times his earnings forecast for fiscal 2006, ending June 30, of $2.38 a share, vs. 2005's $2.19. For fiscal 2007, Plaza expects only $2.45. His profit estimates are less than the consensus. Ethan posted good results in the quarter ended Sept. 30, but Plaza credits much of that to increased share buybacks that reduced shares outstanding -- thus lifting earnings. Another big bear on Ethan is Laura Champine of Morgan Keegan. Many of its franchisees are not doing well, she notes, in part because of rising U.S. imports of Asian furniture. She expects Ethan to buy out struggling franchises to consolidate stores. That can only dent margins, says Champine, who urges sale of the stock on "deteriorating industry fundamentals and valuation." Ethan sells its products at 311 retail stores -- it owns 129, and the rest belong to independent dealers. CEO Farooq Kathwari told analysts that their second quarter and 2006 estimates are "within reach."

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

    Before it's here, it's on the Bloomberg Terminal.