Let it Rain, Let it Hurricane

Updated: Sep 14, 2018

Lumber Liquidators Stock Could Benefit from Rebuilding and Anticipated Operating Improvements During the Second Half of 2018

Shares of Lumber Liquidators are down ~44% year-to-date during Thursday’s trading, but based on historical trends the company’s stock could potentially benefit from homeowners needing to rebuild following Hurricane Florence and projected improvements in future operating results.

In early August 2017, Lumber Liquidator’s shares rose following stronger than anticipated quarterly results from ~$25 to ~$35 but saw additional appreciation from ~$35 to ~$40 following the landfall of three major hurricanes beginning in late August 2017.

While shares of Lumber Liquidators received some benefit to share price during the three major hurricanes in 2017, the stock also saw a pullback following the conclusion of these disasters. After the increase in share price from ~$35 to ~$40 during the landfall of three major hurricanes in 2017, in mid-October after the three major hurricanes concluded, shares pulled back from ~$40 to ~$30. However, in 2017 shares were up ~60% year-to-date prior to positive earnings results and projected tailwinds from rebuilding efforts.

Another potential catalyst beyond the pending natural disaster of Hurricane Florence could be improving core operating results. Management of Lumber Liquidators has provided guidance on prior earnings calls to expect sales growth moving towards high-single digits, year-over-year, versus the annualized five-year growth rate of ~4.8%. The company believes the transition to higher growth could begin in the second half of 2018, with improvements in both gross margin and operating margin anticipated over the next 12 months. Thus, when coupled with the potential tailwinds from rebuilding following Hurricane Florence, and expectations for improvement in core operations during the 2H18, we see potential catalysts.

With shares trading on Thursday only ~10% above meaningful support levels of ~$15.70, coupled with significant negative year-to-date performance, we believe the risk/reward opportunities in shares of Lumber Liquidators seems reasonable. We see potential resistance for shares in the low 20’s, suggesting the possibility of more upside opportunity than current downside risk.

Lumber Liquidator shares currently trade at a market capitalization of ~$500 million, but projected sales estimates from analysts, in 2019, are forecasted at ~$1.2 billion, which would equal a ~9% increase from projected sales of ~$1.1 billion in 2018, and up 20% versus reported 2017 revenues of ~$1 billion. Analysts covering Lumber Liquidators currently project non-GAAP EPS of ~$0.98 in 2019, up from current estimates in 2018 of ~$0.30, and 2017 reported losses of ($1.42). Assuming a forward P/E multiple of ~20x, given the strong forecasted earnings growth, shares could reach the low 20’s resistance.

Lumber Liquidators is not without risks and is still trying to regain ground following concerns raised in prior years that its products could lead to potential health risks. We think that the company has likely moved beyond these prior issues and will now need operating execution to move shares higher.

Disclosure: Grinder Capital is not recommending investors buy/sell shares of Lumber Liquidators, investing involves risks and investors should determine if Lumber Liquidators may fit their individual investment strategies. Both Grinder Capital and Mr. Schreiner own shares of Lumber Liquidators at the time of publishing.

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