The company reported reasonable growth during the first quarter primarily due to a recovery in the housing sector, which is driving demand for home improvement products.
Its performance should be encouraging for investors, as the company posted strong numbers in spite of poor weather conditions. On the grounds of its recent performance, the company raised its sales guidance to approximately 2.8% year-over-year. In addition, it expects the like for like store sales to grow at around 4%.
Similarly, Lowe’s Companies, Inc. (NYSE:LOW) also competes with Lumber Liquidators. Lowe’s generates its maximum revenue through Plumbing, Electrical & Kitchen at around 32%. This is followed by Hardware & Seasonal and Building Materials at around 29% and 18% respectively.
During the first quarter, the company witnessed a decline in sales due to cold and wet weather conditions. Recently, the company made a bid to acquire 60 stores of Orchard Supply Hardware for $205 million in cash. The company believes that this acquisition will enable it in competing with The Home Depot, Inc. (NYSE:HD) and Lumber Liquidators on a par level
Contrary to its peers, Lowe’s Companies, Inc. (NYSE:LOW) has struggled particularly to benefit from the recovery in the housing market, as the first quarter results were nothing less than disappointing. However, if the acquisition goes through, Lowe’s will benefit from an extended reach with 60 added standalone stores to its business. This acquisition can certainly bolster its earnings in the future.
Long call
Below is a quick review on why I think Lumber Liquidators Holdings Inc (NYSE:LL) is a buy:
Recovery in housing industry cycle
Improvement in sales of new U.S. homes
Market leadership
Improvement in operational efficiency
New advertising initiatives
Increase in contribution from high margin products
Larger number of stores
Near zero interest rates resulting in easy credit availability.
Investors with a long-term horizon should hold on to this stock. I expect a correction in the share price of the company with a 9.70% annual return during the next two year.
I hold this view particularly as the company is presently trading at around 34-38 times one-year forward earnings (per earnings guidance issued by the company).
However, it is essential to note that recovery in the economy will lead to higher revenue for the company in the coming years. This, coupled with superior operational efficiency, can lead to a revenue and EPS growth of 22% and 30% respectively over the next two years.
Therefore, by 2015 we can expect the company to deliver an EPS of $3.25. Considering the PE multiple of 30 (higher than the industry due to its competitive advantage), Lumber Liquidators Holdings Inc (NYSE:LL) shares are expected to trade at around $98 by 2016. Hence I suggest investors to hold on to its stock.
The article Several Reasons to Be Bullish on Lumber Liquidators! originally appeared on Fool.com and is written by Ashit Gulati.
Ashit Gulati has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Lowe’s, and Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. Ashit is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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