Is Fantastic Holdings Limited or Nick Scali Limited the better housing boom investment?

The booming property market has not just seen house prices increase, it has also seen furniture sales increase along with them.

There are two furniture retailers listed on the ALL ORDINARIES (Index: ^AXAO) (ASX: XAO) which have benefited greatly from the boom, with both reporting record half-year sales in 2016. The two retailers in question are of course Fantastic Holdings Limited (ASX: FAN) and Nick Scali Limited (ASX: NCK).

Whilst both are great companies experiencing strong tailwinds from the housing boom, I would recommend an investment in just one of them in order to maintain a diverse portfolio. But which would be the better investment today?

Let’s start with Fantastic Holdings. It is the operator of the Fantastic Furniture, Plush, Le Cornu, and Original Mattress Factory brands. Except for its Le Cornu brand, all brands have had an outstanding start to the fiscal year helping total sales grow by almost 12% year on year.

Accounting for 72 of its 126 stores is its flagship value brand Fantastic Furniture, which contributed $198 million of its $272 million in half year revenue. Management believes it can grow the Fantastic Furniture brand to 90 stores throughout Australia. I believe if the company were to expand to this level it could potentially add around $100 million to the top line on an annual basis judging by the current sales per store rate. Providing it doesn’t cannibalise sales along the way.

It’s a similar story for its Plush and Original Mattress Factory brands, which have been pointed out by management as having a lot of room to grow. This supports the view of analysts that see it growing its earnings at 27% per annum through to FY 2018, according to CommSec.

At the current price the shares are expected to pay an estimated fully franked 6.1% dividend in FY 2016, making it a very attractive investment in my opinion.

But is rival Nick Scali Limited an even better investment?

Last month the operator of the Nick Scali Furniture and Sofas 2 Go brands updated its full year net profit after tax guidance to be in the range of $24 million to $26 million. This will be a big increase from last year’s record net profit of $17.1 million, revealing just how well the company is tracking this year.

Whilst its store footprint is much smaller than Fantastic Furniture’s, the company believes there is an opportunity to increase it significantly. Currently there are 43 Nick Scali Furniture stores, but that looks set to change in the years ahead. After a recent review management reiterated its target of 75 stores in Australia and New Zealand.

Its value brand Sofas 2 Go is still in its infancy with just five stores, but I expect the company will slowly but surely grow its footprint and compete head on with Fantastic Furniture.

As well as its strong growth prospects, I believe its growing dividend is also attractive. The company has increased its dividend by an average of 8% per annum for the last 10 years. Currently its shares provide a fully franked 3.2% dividend.

Foolish takeaway

Nick Scali may pay a smaller dividend and trade on a higher price-to-earnings ratio, but I would still choose it over Fantastic Holdings today. This is simply because I feel more confident Nick Scali can expand without cannibalising its own sales.

But ultimately, all this depends on the state of the housing market moving forward. Both companies should continue to produce strong results whilst the market remains strong. But if there is a downturn in the market then both shares could come under pressure very quickly. Investors would be wise to keep an eye out for any signs of weakness.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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