On Tuesday, after issuing year-end and 2014 fiscal year earnings guidance the day before, shares of Lumber Liquidators Holdings (NYSE: LL) fell more than 13.6%. Based on this price movement alone, it's not hard to say that investors weren't impressed with management's forecast for the company. However, is it possible that Mr. Market is overreacting to the news and that, instead, Lumber Liquidators could present the enterprising investor with an attractive opportunity to buy an attractive company at a fair price?
Management forecasts a lot of growth... but not enough
For the company's fourth quarter, management announced that earnings per share can be expected to come in between $0.69 and $0.72. This represents a great improvement compared to the $0.50 the company reported during the fourth quarter last year, but falls short of the $0.73 that Mr. Market expected. If accurate, this would imply earnings per share for the year between $2.72 and $2.75. While this is higher than the $2.65 to $2.74 that management previously expected, it falls short of the $2.75 that Wall Street analysts were looking for.
Despite earnings expected to come in short, revenue is another story entirely. The company believes that consolidated sales will come in between $994 million and $1 billion. This is in line with the $995.55 million that analysts expect for the year. Compared to the $813.3 million the company reported for its 2012 fiscal year, any growth around what management expects is attractive. According to the company, the increase in its revenue expectations from the $985-$995 million range previously expected will be due to a 15% to 16% rise in comparable store sales, coupled with the addition of 29 to 30 new locations.
For next year, management expects even better results, with earnings per share rising to between $3.25 and $3.60. This too is in alignment with the $3.50 that analysts expect, but the large divide between the upper and lower estimates might have some investors concerned that management is uncertain about the company's prospects.
Revenue is also expected to rise to between $1.15 billion and $1.2 billion. Just as in the case of revenue for this fiscal year, the primary drivers for revenue growth will be comparable store sales growth between the high single digits and low double digits, combined with the addition of 40 to 50 new locations. This too is forecasted to fall in line with the $1.16 billion that analysts expect.
How does Lumber Liquidators stack up against Home Depot and Lowe's?
Compared to Home Depot (NYSE: HD) and Lowe's Companies (NYSE: LOW), Lumber Liquidators is incredibly small. Right now, the company has a market capitalization of around $2.5 billion, far smaller than the $49.9 billion of Lowe's and almost microscopic when set against the $111 billion behemoth that is Home Depot. Despite the difference in size, the company has successfully competed with both of its peers, as demonstrated by its net profit margin.
Over the company's last five years, its net profit margin (the percent of every dollar in revenue that is converted into profit), has averaged 4.7%. This matches the 4.7% earned by Home Depot but outstrips the 4% earned by Lowe's. On top of comparable profitability, the company has demonstrated an amazing ability to grow. Looking at the same time horizon, revenue at the firm has jumped 68.7% from $482.2 million to $813.3 million.
In comparison, Home Depot was only able to grow by 4.9% while Lowe's brought up the rear with 4.8%. Admittedly, the disparity in growth is partially attributable to the market size of Home Depot and Lowe's compared to their smaller rival, but it should act as a warning signal to them that another player has learned how to compete on par even without the same market presence.
As we can see, Lumber Liquidators is a small business compared to both Lowe's and Home Depot. Despite this, the company appears to be extremely healthy and growing, but not at the rate investors hoped it would. At 36 times earnings, the business is, by no means, cheap, but it would appear as though market participants are overreacting to the news of slightly lower guidance.
Furthermore, the fact that a class action lawsuit is being filed against it for the lower-than-hoped for guidance is a sign that Mr. Market fears the slower (but still phenomenal) growth is a signal of tougher times to come. Because the business is still chalking up impressive returns and expects to continue this trend into next year, I believe the Foolish investor would do well to focus on the company's fundamentals as opposed to Mr. Market's fears. Doing so would suggest that Lumber Liquidators isn't a bargain but is far from the low-quality play Mr. Market made it look like today.
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