It may come as a surprise, but you need to watch the wood flooring industry. While that sounds a lot like "You need to watch paint dry," things are about to get pretty exciting in that sector. The Department of Commerce will release a preliminary ruling on its anti-dumping investigation later this month.
Anti-what?
In late October, a group called the Coalition for American Hardwood Parity petitioned the government to investigate whether Chinese hardwood flooring manufacturers were exporting to the United States with anticompetitive pricing, a practice known as "dumping." The coalition comprises a group of U.S.-based hardwood flooring manufacturers, including one owned by Berkshire Hathaway (NYSE: BRK-B ) (NYSE: BRK-A ) itself, who feel that this alleged practice unfairly hurts their business.
In December, the Commerce Department unanimously granted their petition; the preliminary results of the investigation should arrive later this month. If the allegations prove true, the U.S. could impose duties of as much as 242.2% on the Chinese imports -- and it seems pretty likely that the Commerce Department will rule in the coalition's favor.
Unfortunately, every member of the coalition is a private company, except Shaw Industries, the aforementioned Berkshire division, which isn't likely to make much impact on Berkshire's stock price. However, the industry as a whole will feel the shockwaves of the Commerce Department's decision, for better or worse.
The biggest losers
If the full 242.2% duties get imposed, the obvious losers will be anyone who needs to buy these products, and similarly, anyone who needs to sell them. Home-improvement retailers like Home Depot (NYSE: HD ) and Lowe's (NYSE: LOW ) will take a hit, but specialty retailers like Lumber Liquidators (NYSE: LL ) will suffer an even graver blow.
I mentioned Lumber Liquidators last week as a good play on housing. While new home sales might remain slow, current homeowners may remodel, either to make their homes more attractive for selling, or because they can better afford a new floor than a new home. I still stand by that thesis.
Lumber Liquidators focuses solely on hardwood flooring, but according to management, the new duties could affect only 7%-9% of their sales. That's a big chunk, to be sure, but not enough to ruin the company. Management also claims to have good relationships with its suppliers, and it's working with them to find alternatives to its Chinese-made wares.
Walking the plank
Whether or not Lumber Liquidators makes it through this crisis in the long run, it's bound to be a headache for the business in the near term. The company is already picking up the pieces from its botched SAP installation in the last half of 2010. A software upgrade intended to increase efficiency and inventory management ended up creating a host of problems, crippling the company's basic ability to do business, and forcing it to offer more favorable payment terms to its customers. The market didn't seem to care much at first, but the recent news that the mess still hasn't been sorted out caused a sharp drop in the stock price.
Trying to put out two fires simultaneously will make it hard for Lumber Liquidators to deal with either. And while management may be confident that they can find new suppliers, an industry insider (who does not work for Lumber Liquidators, and wishes to remain anonymous) tells me that there's very little Asian production capacity outside of China. Domestic suppliers are actually trying to raise prices, and will therefore be reluctant to help Lumber Liquidators. Ah, the cost of being a Rule Breaker.
My contact actually favors Armstrong World Industries (NYSE: AWI ) in this fight. While I'm still wary of Armstrong's exposure to new homebuilding and commercial real estate, my contact -- who isn't affliated with Armstrong, either -- pointed out that the company has some of the greatest domestic wood flooring manufacturing capacity, and will see a big boost in demand if higher import prices force customers to buy American. This may well be enough to change my mind about the company.
Keep your ear to the floorboards
This industry shakeup makes these stocks anything but boring. The preliminary ruling is expected later this month, and the final ruling in June. Click the links below to add these stocks to My Watchlist, our free, personalized stock tracking service, so you can stay updated.
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