Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Restoration Hardware Holdings Inc (RH), Lumber Liquidators Holdings Inc (LL): Is This Home Improvement Stock Presenting a Great Post-Earning’s Opportunity?

Restoration Hardware Holdings Inc (NYSE:RH) announced Q2 earnings on September 10, and increased guidance in just about every notable metric. But after a 125% gain in 2013, is this stock presenting value, and is it still a good buy?

How’s it measure up?
On July 25, I wrote an article entitled ‘Which Stock Is Best in the Home Improvement Space ?,” which clearly showed the level of value in shares of Restoration Hardware Holdings Inc (NYSE:RH) compared to Lumber Liquidators Holdings Inc (NYSE:LL).

Restoration Hardware Holdings Inc (NYSE:RH)

Both companies operate in the home improvement space but have different operational approaches. Restoration offers products for high-end consumers while Lumber Liquidators Holdings Inc (NYSE:LL) is primarily a floor company. Yet, due to stock performance, and industry, both are often compared.

Since my first article, Lumber Liquidators Holdings Inc (NYSE:LL) and Restoration Hardware Holdings Inc (NYSE:RH) have posted stock gains of 15%, and after Restoration’s recent quarter, the value is even more apparent. Take a look at a few key metrics that were used in the previous article, but with updated “full-year guidance” from the company’s Q2 report .

Lumber Liquidators Restoration Hardware
Revenue/ year-over-year Growth $951 million/ 17 % $1.57 billion/ 32%
Comparable Growth Guidance High-Single/Low-Double Digits 26%
EPS Guidance $2.52 $1.68
Market Cap $2.96 billion $2.77 billion
Price to 2013 Expected Sales 3.11 1.76
Forward P/E Ratio (2013 full-year) 42.64 43.4

Lumber Liquidators Holdings Inc (NYSE:LL) and Restoration Hardware Holdings Inc (NYSE:RH) are fast-growing companies, but clearly, Restoration is growing faster and is priced cheaper.

With 32% expected top-line growth, and a price to 2013 sales of only 1.76, the comparison really ends. In theory, two companies in the same industry share a similar valuation if growth is comparable. When one company has greater growth, the market awards a higher valuation compared to the fundamentals, as expectations become higher.

In the case of Lumber Liquidators Holdings Inc (NYSE:LL) and Restoration Hardware Holdings Inc (NYSE:RH), this is simply not the case. Restoration should be awarded the higher valuation, and has proven quarter-after-quarter that its growth is nowhere near ending. In fact, Restoration has increased guidance in each quarter since becoming public last year, and in an economy with somewhat stagnant growth, Restoration is a rare performer.

Irrational behavior means what?
Surprisingly, after Restoration Hardware’s impressive Q2, where revenue grew 30% year over year, shares fell 4% in afterhours to $73. This performance came despite a quarter where comparable sales grew 26%, meaning the majority of revenue growth came from existing stores. In the quarter, Chairman and Co-CEO Gary Friedman conveniently notes that Restoration’s comparable growth from 2011-2013 has been 17%, 31% and now 26%, thus showing continued strength.

Now, it is very difficult to determine why Restoration’s stock fell lower, but looking ahead, it doesn’t really matter. In the long run, if a company does good, its stock usually follows, thus we can label Restoration’s current performance as irrational behavior in the market.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.