Berkshire Hathaway‘s (BRK.A .90%) (BRK.B 1.24%) chairman and chief government officer, Warren Buffett, has observed numerous recessions, wars, and global pandemics in excess of his investing career spanning much more than eight decades. His life span of investing encounter and good results is why it really is savvy to take into consideration being a fellow shareholder of amazing corporations alongside the Oracle of Omaha.

Amid the smaller sized holdings in Berkshire Hathaway’s portfolio is a 4.5% stake well worth virtually $500 million in the specialized property improvement retailer Ground & Decor (FND 4.27%). Let’s dig further into why this underrated retailer could be deserving of a position in your portfolio. 

A specialty market place in the enormous property advancement marketplace

When buyers feel of household enhancement vendors, big-box suppliers these as Lowe’s (Low 2.57%) and Dwelling Depot (High definition 2.21%) are generally the first to appear to thoughts. This is arguably for the reason that they provide each sector in the household advancement business.

Ground & Decor almost certainly would not arrive to most people’s minds forward of these two providers since its niche is hard-surface flooring. But the retailer just isn’t a operate-of-the mill, niche small business: With much more than 4,000 products and solutions in its warehouse-themed retailers, Flooring & Decor has anything you could perhaps visualize for flooring and additional that you can not find at any other shop.

FND Gross Profit Margin info by YCharts

Ground & Decor’s perfectly-established interactions with manufacturers and quarries also permit it to supply tile, wooden, and stone floors straight from these sellers. This prospects to reduce expenditures in comparison to its competitors, which translates into decrease costs for prospects and outstanding gross margins for the enterprise. Floor & Decor’s gross margin was most not long ago just under 40%, which was nicely above Lowe’s and Home Depot.

And with just 191 warehouse merchants in 36 U.S. states, the business anticipates that it will enter quite a few a lot more marketplaces in the coming decades. This is why Ground & Decor has a long-phrase aim to open 500 stores. Analysts feel that the rapidly escalating shop depend will ability 19.4% annual earnings growth about the next 5 decades. For context, this is almost triple the 6.7% once-a-year earnings growth price that is predicted from the residence advancement retail market for that period. 

The firm’s financial wellness is practically flawless

Investors require not be concerned about regardless of whether Floor & Decor has the funds to fund its expansion ambitions. That is since the company’s harmony sheet is really sturdy.

Analysts be expecting the company’s internet personal debt place to be nearly $95 million. Stacked from the $660 million in earnings before fascination, taxes, depreciation, and amortization (EBITDA) that is projected for 2023, this is a internet personal debt to EBITDA ratio of just a tad much more than .1. Basically place, Ground & Decor’s personal debt load is pretty much nonexistent compared to Property Depot’s expected net personal debt to EBITDA ratio of 1.5 for 2023.

Huge compounders really don’t come low-cost in the conventional feeling

Just after a sizable share rate drop in 2022, the sector has cozied up to Ground & Decor in 2023. The inventory has rocketed upward by 42% so much this 12 months.

This has pushed Ground & Decor’s forward price-to-earnings (P/E) ratio up to 33.8. Whilst that is substantially increased than the home improvement retail business normal ahead P/E ratio of 18, the company’s vastly greater progress potential and outsized overall returns in the latest many years justify this valuation in my impression. 

Kody Kester has positions in Property Depot and Lowe’s Corporations. The Motley Fool has positions in and endorses Berkshire Hathaway and Home Depot. The Motley Idiot suggests Lowe’s Corporations. The Motley Fool has a disclosure policy.