Magic Carpet Ride

While rising interest rates are dampening the housing market in general, the high-end segment of the market continues to be resilient. In addition to new housing, remodeling activity remains on the uptrend, which is positive for the carpet and floor covering niche of the home-furnishing industry.

Investors should look at small-cap carpet manufacturer Dixie Group (NASDAQ: DXYN), for a potential 60 percent stock price increase over the next year.

Dixie Group has delivered 37 percent sales growth in 2013 and is projected to increase earnings per share (EPS) by 190 percent over the next two years. Despite this expected growth, the stock trades at a 65 percent discount to its enterprise value.

Dixie Group is a manufacturer and marketer of carpet and rugs to high-end residential customers through the Fabrica International, Masland Residential and Dixie Home brands. The company began its operations in 1920 and transitioned from textiles to floor covering in the 1990s. In 2004, it refined its focus on upper-end markets including both commercial and residential. The company is known for its innovative styling, design and colors.

Following a disappointing year in 2012, Dixie Group has beaten analyst estimates for three straight quarters. The company is delivering results from investments made in new products, processes, businesses and sales coverage during the last two years. The investment in growth initiatives has positioned Dixie Group to continue outperforming the industry at the high end of the marketplace in the coming years.

In the third quarter of 2013, the company had sales of $90.2 million and income from continuing operations of $1,432,000, or $0.11 per diluted share, compared with sales of $65.8 million and income from continuing operations of $269,000, or $0.02 per diluted share for the third quarter of 2012.

The third quarter sales improvement was a robust 37 percent over the pr! ior year’s quarter. Company residential products grew 35 percent, compared to the same period a year ago. Analysts believe that the residential market grew in the high single digits during the quarter and should continue to improve over the next year. Sales for commercial products increased nearly 40 percent versus the third quarter of 2012.  All of the Dixie Group product categories were up, showing the broad nature of the market momentum.

Year to date through November 1, the S&P Home Furnishings Index rose 32.6 percent, compared to a 24 percent increase for the S&P 1500 Index. In comparison, Dixie Group is up an astounding 270 percent year to date. While the company has produced exceptional sales and earnings growth, it trades at only 0.46 times sales in the most recent quarter.

Dixie Group currently has a total market cap of $166 million but has an enterprise valuation of $273 million. This indicates that the stock is trading at a 65 percent discount to its enterprise valuation.

Dixie Group had a loss of $0.5 per share in 2012 but improved its EPS to $0.35 in 2013. Dixie Group is projected to grow EPS by 91 percent to $0.67 in 2014. In 2015, EPS is projected to grow another 50 percent to $1.01. In summary, EPS will grow from $0.35 in 2013 to $1.01 in 2015, an increase of 190 percent in two years.

Thomson Reuters consensus has a strong buy rating of 1.0 on the stock. Dixie Group has a 12-month price target of $20, an increase of 60 percent.

Greg Pugh, an income-investing expert, publishes a newsletter called Investing for Monthly Income.