Second, and more importantly, Lumber Liquidators Holdings Inc (NYSE:LL) appears to have been a prime beneficiary of the housing bust, as homeowners chose to re-do floors in existing homes to spruce them up for sale. It’s hard to know how long this remodeling cycle can last, but it’s been under way for nearly a half decade. As new home construction starts to take off, builders install their own flooring and don’t tend to purchase more expensive ready-made flooring.
Third, the company is heavily exposed to lumber prices, and if new home building picks up in 2014, as many expect, then a key raw material will start to create a drag on margins.
Finally, the company’s competitive pricing compared to rivals such as Lowe’s Companies, Inc. (NYSE:LOW) and The Home Depot, Inc. (NYSE:HD) appears to have come at the expense of quality. Contractors give the firm very low ratings. That bodes poorly in terms of repeat business.
Meanwhile, nosebleed valuations for this stock imply it cannot afford to stumble in the quarter ahead. Lumber Liquidators Holdings Inc (NYSE:LL) has exceeded profit forecasts by an average of 28% over the past four quarters. Investors are now conditioned to expect such outperformance in the third and fourth quarters as well. Analysts have recently sharply raised their forecasts, making it much harder to exceed what had been a low bar of expectations.
Let’s take a closer look at those valuations. Shares trade for 57 times trailing 2012 profits, and 36 times projected 2013 profits. To put that in perspective, Lowe’s and Home Depot trade for roughly 20 times projected profits for the current year. Said another way, Home Depot’s price-to-sales ratio is about 1.5, and that metric is around 1 for Lowe’s. Lumber Liquidators trades for nearly 3 times sales.
Add it up, and Lumber Liquidators has proven to be a solid growth story with eye-popping valuations to show for it, but clouds are emerging. And, perhaps as soon as the next quarter, the stock could hit an air pocket if:
1. The company fails to deliver better-than-expected results as it has recently done.
2. Management more candidly discusses the challenges facing the same-store sales opportunities at its newest, second-tier sites.
3. Management notes that the recent renovation boom associated with the foreclosure mess is starting to peter out.
It’s only a matter of time before investors realize that this stock’s valuation reflects a long-term growth opportunity that doesn’t exist anymore. When that happens, LL could make a quick move back to the $65 area or perhaps even lower.
Recommended Trade Setup:
— Sell LL short at $88 or above
— Set stop-loss at $105
— Set initial price target at $65 for a potential 26% gain in eight week
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