Lumber Liquidators (NYSE:LL) created fresh all-time highs on Wednesday after the company reported earnings that beat expectations. However, after gains of 120% year-to-date, and a recent federal raid, is this stock still a good buying opportunity?
It is a buy now?
Make no mistake, Lumber Liquidators' quarter was phenomenal. The company accelerated its revenue, gross margin, and its comparable-store sales compared to its previous quarter. In particular, revenue grew 24.5%, with 17.4% of that growth being from existing stores. These gains complement the company's statement that both traffic and average ticket prices rose significantly in the quarter.
Clearly, analysts' expectations were easily surpassed, but still, this doesn't answer the question as to whether or not Lumber Liquidators is still a good buy. If we compare Lumber Liquidators to a company with similar growth in the home- improvement space, then no, Lumber Liquidators is not a good buy right now.
Cheaper with faster growth
While midpoint same-store sales guidance of 11.5% is thoroughly impressive, it is nowhere near the 26% growth that Restoration Hardware (NYSE:RH) is producing. While Lumber Liquidators focuses solely on flooring, Restoration Hardware is a much more diversified company, catering to the wealthy and home remodeling as a whole.
In its last quarter, sales rose 30%, and impressively, all of its growth came from existing stores. Restoration Hardware has seen growth greater than 30% for the last year yet has not added one new store. Currently, the company is seriously eyeing more than a dozen regions for expansion, and is expected to create new stores in the coming year. This will spark further growth to complement double- digit same-store sales growth.
In addition to faster revenue and comparable-store sales growth, Restoration Hardware is also cheaper. It trades at just 1.8 times sales and 31 times next year's earnings. Lumber Liquidators trades at a whopping 3.2 times sales and 34 times next year's earnings, thus adding to the fact that Restoration Hardware is the better option.
The serious unknowns
Just because a company is not growing the fastest or priced the cheapest doesn't mean it's a bad company. In the case of Lumber Liquidators, such a statement may apply. But then, there is the scenario surrounding its federal raid, and the unknowns surrounding the event.
In a previous article, I highlighted a report from blogger Xuhua Zhou. In June, Zhou conducted thorough research showing that Lumber Liquidator products were in "gross violation" of emission standards in the state of California, stemming from toxic levels of a carcinogen called formaldehyde.
Then, last month, the feds stormed the company's headquarters and warehouses in relation to illegal wood and products shipped from its China business, which is a key driver in Lumber Liquidators' ability to drive margins higher and offer cheap products.
Unfortunately, there are many questions regarding this issue with Lumber Liquidators, and if any wrongdoing is found, the company might have to recall products, close its facility in China, and would likely lose the support of consumers.
With that said, we can not deny that Lumber Liquidators is growing fast, but given these problems investors might find a better opportunity in a company such as Lowe's (NYSE:LOW).
Safe, cheap, and growing fast
By investing in Lowe's, you're not going to find comparable sales growth of 11% annually (like Lumber Liquidators). However, you will find comp growth of 4.5% and you'll pay one times annual sales versus 3.2 times sales for Lumber Liquidators. Therefore, with all things considered, Lowe's has a better balance of growth and valuation.
Moreover, Lumber Liquidators remains risky because it lacks diversification in the space, while Lowe's is an investment in the overall home-improvement space itself. Lowe's 4.5% comp-growth guidance is outperforming industry growth of 3.1% annually, suggesting that Lowe's is stealing market share.
In addition, investors have to like the company's recent move to purchase bankrupt Orchard Supply Hardware. Orchard failed as a result of the financial crisis, having 89 of its 91 stores in a California market that was plagued with high foreclosure rates and declining home-ownership levels. Yet, when we look beneath the surface, this was likely a great acquisition, and many analysts are now projecting similar deals in the future.
Most notably, Lowe's was able to purchase Orchard for just $205 million, or $2.2 million per store. In its last fiscal year, Orchard produced sales of $657 million. Thus, Lowe's bought the company for just 0.3 times sales, far below its one times sales valuation.
Also, the market in California has become lucrative, being one of the faster growing regions in the country, making the macro events that led to Orchard's bankruptcy no longer an issue. This fact combined with growth and its valuation makes Lowe's a much safer and better investment compared to Lumber Liquidators.
Essentially, Lumber Liquidators has too many questions. In this space, the overall growth is too great and the valuations are too low to take a chance on a company like Lumber Liquidators, which could have substantial questions raised from its federal raid in the coming months.
Until those questions are answered, Restoration and Lowe's are presenting a strong value opportunity, meaning it might not be wise to chase Lumber Liquidators' shares at all-time highs.
Brian Nichols owns Restoration Hardware. The Motley Fool recommends Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.