Flooring: Market Trends

In Support of Lumber LiquidatorsImagine you run a wood products firm with a stock that is on tear, and sales are continuously rising. You are executing big investment plans, tied to the housing recovery and remodeling improvement. That's Lumber Liquidators.

As a result, Lumber Liquidators - like Home Depot and Lowe's - is a barometer for the housing recovery, and so it gets a lot of attention from investment analysts. Yesterday, Lumber Liquidators set forth an upbeat earnings forecast during a presentation for Credit Suisse. But its stock turned south after. Why?

Sourcing its wood products globally, including the Siberian forests straddling China and Russian Lumber Liquidators is vulnerable to subcontractor misdeeds, thought it declares it performs due diligence with rigor. Nevertheless, Lumber Liquidator's headquarters were visited by federal investigative agencies tracking down suspect wood sourcing.

In Support of Lumber LiquidatorsSome investor analysts express the belief that Lumber Liquidators will handle that concern well.

But another issue is its profitability, which analysts gauge ultimately by earnings per share" measures. (This is one reason publicly traded firms buy back stock: if there is less of it, the earnings per share on average will be higher.)

Imagine running a wood products firm where outside analysts comment with such detail on your operational practices (this from Piper Affray analyst Peter Keith, via Seeking Alpha). 

We are recommending investors buy shares of Lumber Liquidators this morning on weakness caused by the company's updated guidance last night. We believe most investors are focused on the lower than anticipated gross margin for Q4, which can be explained primarily by a shift to solid hardwood sales which carry a lower gross margin but contribute to higher gross profit dollar growth given the products high ticket nature.

Additionally, the company provided an initial 2014 outlook which was above current consensus on a sales basis but the midpoint is slightly below on an ESP basis. We believe the company is setting up for a beat and raise cadence and believe the 2014 guidance looks conservative.

Meanwhile a law firm that specializes in such cases has launched a shareholder suit against Lumber Liquidators. And two other critical research reports have been issued about its products and practices.

I just think the company is well run, and it is investing heavily - and it deserves credit for that. It will also do well, because Lumber Liquidators is firmly entrenched, and well positioned, in a recovering market.

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