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Why There’s Still Plenty of Hope for Lumber Liquidators Stock

Will Healy

Lumber Liquidators (NYSE:LL) stock fell by over 20% following its second-quarter earnings report. The Virginia-based flooring retailer reported a loss as it missed earnings estimates by 30-cents-per-share despite higher revenues. One-time charges, such as higher legal fees and marketing costs, played a significant role in bringing earnings down. However, the long-term profit growth that analysts had forecasted for LL stock remains on track.

Given the prospects for recovery, this knee-jerk reaction may have created a lucrative buying opportunity in LL stock.

Lowered Earnings on Higher Revenues Hurt LL stock

Lumber Liquidators stock saw a massive drop as unexpected charges undermined confidence in the equity. For Q2, the company reported a loss of 5-cents-per-share. Lumber Liquidators had earned 15-cents-per-share in the same quarter last year. Wall Street had expected earnings of 25-cents-per-share. Conversely, revenues of $283.47 million beat Wall Street estimates and grew by 7.6% over last year’s levels. Also, comparable store sales rose by 4.7% when analysts had expected only 2.8%.

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Despite the higher sales, profits still fell, and this brought about the 20.6% drop in the stock on July 31, following earnings. Higher transportation costs, promotions and costs related to discontinued offerings weighed on profitability.

The company also found itself hurt by higher legal costs. LL spent $9.5 million during the quarter related to legal expenses as it faced a class-action suit related to Chinese-made flooring. A story on 60 Minutes alleged that this flooring contained amounts of formaldehyde exceeding California’s emission standards.

This and other issues Lumber Liquidators faced earlier this year has reduced the stock price by over 50% in recent months. LL stock now trades near its 52-week lows. The equity has also experienced a wild ride this year. The stock saw a similar drop in May during the last earnings report amid higher lumber prices and tariff-related fears. However, it had recovered most of that loss until the July 31 report sent LL stock back down below $20-per-share.

This Drop May Have Created a Buying Opportunity

I believe the question now involves whether this move indicates a double bottom? The short answer is “possibly.” The stock peaked at over $114-per-share in October 2013. By early 2016, LL stock fell as low as $10-per-share. The stock spent most of the second half of 2016 near the $15-per-share range. It has since traded higher, though with much more volatility.

Still, forecasted profits could bode well for LL stock. Forecasted earnings for 2018 fell from 74-cents-per-share to 65-cents-per-share with the earnings report. However, keep in mind that the second quarter losses stemmed from one-time charges. And despite the unexpected expenses, this still marks an improvement over the $1.33-per-share loss LL stock saw in 2017.

Profit Growth for LL Stock Remains on Track

Moreover, analysts forecast 2019 profits will come in at $1.08-per-share on a consensus basis. They also predict an average profit growth rate of 30%-per-year over the next five years. This exceeds the growth rate of both Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW).

It so happens that 65-cents-per-share in earnings takes the forward price-to-earnings (P/E) ratio to 30. Although that may appear expensive, a P/E of 30 and a 30% growth rate indicate a price-to-earnings-to-growth (PEG) ratio of 1. The average PEG ratio for the S&P 500 stands at about 1.33. This helps LL stock stand out above Floor & Decor Holdings (NYSE:FND), which grows at a comparable rate but supports a forward P/E of just under 48.

In my view, the PEG of 1 makes LL stock a worthwhile investment for those who can stomach the volatility. In addition to the PEG ratio, the stock trades over 80% below its all-time high. And despite its status as the largest specialty retailer of hardwood flooring in North America, the market cap stands at just over $550 million.

Final Thoughts on Lumber Liquidators

Profit growth has placed LL stock on a path that will make the latest earnings report a temporary setback. The market hammered Lumber Liquidators for reporting lower profits on increased revenue. However, investors need to keep in mind that one-time charges hampered the company.

Despite this setback, analysts still predict a 30% average growth rate for the company over the next few years. Even with a forward P/E of 30, this growth rate gives LL stock more potential to rise than to fall. Investors who can stomach the volatility and wait for the profit growth to materialize should do well in LL stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @HealyWriting.

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