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Roundtable: Is It Time to Buy Lumber Liquidators?

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By now you've heard the news about Lumber Liquidators (NYSE: LL  ) , and stared agape as the stock took it on the chin (and everywhere else) Thursday, to the tune of 29%. The company announced it was shaving its sales estimates for the year.

Bad news? Sure. But has the massive sell-off turned this stock into a buy?

I asked three analysts to ponder that question and then posed them another: If Lumber Liquidators is not a buy, is there a better stock to target in the retail segment?

Rich Duprey, contributor
Although the market splintered Lumber Liquidators' stock after it ran second-quarter guidance through a buzz saw, I'm not sure I'd be walking over to pick up the pieces -- or shares -- just yet.

Even after being put on the chopping block, the flooring specialist still trades at 16 times management's upper end of earnings estimates for 2011, more than either Lowe's (NYSE: LOW  ) or Home Depot (NYSE: HD  ) .

And you can't sweep under the rug the fact that housing won't recover until next year at the earliest, assuming unemployment makes it down to 8%. But as last week's jobs numbers show, private sector hiring is exceptionally weak, and joblessness remains north of 9%.

However, Lumber Liquidators isn't a homebuilder, so it's not crumbling. Like Sherwin-Williams (NYSE: SHW  ) , it relies a lot on current homeowners wanting to spruce up where they live and 90% of its customers are existing homeowners. Housing's decline will naturally scuff up sales some as consumers are brought further underwater on their mortgages, but beneath the veneer remains a solid-as-oak -- and profitable -- low-cost industry leader.

But I'd look first for a solid foundation forming under housing and employment before fitting Lumber Liquidators into your portfolio like a tight tongue-and-groove joint.

Alyce Lomax, contributor
The housing market still stinks, and subsequent softened consumer demand led to the market's recent hatchet job on Lumber Liquidators. Should investors knock on wood and hope there's now a floor beneath this company's stock price? I don't think so. With continued high unemployment adding to the economy's woes, I doubt droves of consumers will motivate to improve their surroundings in any meaningful way. Lumber Liquidators' hardwood flooring products scream "housing bubble" more than bargain.

I'd avoid any stocks that directly relate to homeownership or home improvement right now, including Home Depot and Lowe's.

Investors are better off with a true-blue retailer like Costco (Nasdaq: COST  ) , which trades at a premium price to many retail stocks, but has solid performance and a golden brand to speak for it. Costco's concrete sales floor is the bargain hunter's paradise, giving it an advantage in good times and bad. Even better, it doesn't rely on something as sketchy as consumers' psychological urge to splurge on renovations in a rotten economic climate. For the time being, Lumber Liquidators looks more like a dead stump than a healthy grower.

Rick Munarriz, contributor
I'm not ready to tell Lumber Liquidators to walk the plank.

Is this a lousy time to be selling classy hardwood flooring? Yes. When nearly a fifth of the mortgage holders out there owe more than their homes are worth, there's no point in upgrading residences that may be handed back to the bank. However, as the niche leader with the economies of scale to deliver the best pricing on stylish flooring, Lumber Liquidators should be the first to bounce back.

It's important to remember that the retailer remains very profitable during this cyclical rough patch.

Unlike Builders FirstSource (Nasdaq: BLDR  ) or the many homebuilders that have been reporting quarterly deficits for a couple of years, Lumber Liquidators isn't at the mercy of new residential construction (a market that may never bounce back). All it needs is for the market for existing homes to stabilize and for the economy to improve to the point where homeowners are ready to spruce up their flooring again. It will happen, and after the recent haircut it's a great entry point for investors.

Foolish bottom line
So there you have it -- just one in favor of the hardwood flooring specialist and two against. For what it's worth, I'm also inclined to pick up shares of Lumber Liquidators, but I may wait until the sawdust settles from this recent shake-up. What do you think? Is now the time to tuck into some Lumber Liquidators?

Jim Royal, Ph.D., does not own shares of any company mentioned here. The Motley Fool owns shares of Costco and Lumber Liquidators. Motley Fool newsletter services have recommended buying shares of Lumber Liquidators, Costco, Sherwin-Williams, Home Depot, and Lowe's. Motley Fool newsletter services have recommended writing covered calls in Lowe's. 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.

Read/Post Comments (4) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 12, 2011, at 10:57 AM, jbuckhaults wrote:

    What about the high number of consumer complaints I read about the company. I realize with their level of sales there will always be some complaints, but there are many compaints that are not resolved satisfactorily. Is it possible that this is finally having an impact on sales? Considering that they increased sales/profits in 2009 and 2010, it seems odd to stumble in 2011 and blame it on the consumer economy.

  • Report this Comment On July 13, 2011, at 1:26 PM, hanover67 wrote:

    I went to LL when we decided to re-do our kitchen floor. We picked the most expensive brand of oak hardwood and used one of LL's recommended installers. The product and the installation were terrific and the new floor is great and done at about 2/3 the cost of a synthetic "floating" type product suggested by Sears.

    Then I looked at the company from an investment standpoint - before their SAP problem. I was impressed with their low-cost-producer approach and their groeth plans, so I bought the stock starting in October of last year. My average cost is $22.33 so I'm under water so far.

    But, I believe it is a good story in the long run. If it dips further, I'll buy more. As to complaints, we had several boxes of flooring left over and the company took them back, no questions asked, for a full refund.

  • Report this Comment On July 14, 2011, at 7:56 PM, FoolTheRest wrote:

    Hanover, our community can always use real-world experience and your comments are much appreciated. Your experience is especially unique as both the customer and investor. It could only be more complete if you also worked on the sales floor. Thanks again!

  • Report this Comment On July 16, 2011, at 12:36 AM, Woodie995 wrote:

    Look at how much stock the founder T. Sullivan sold since January. Shouldn't that tell you something? The p/e on this stock should be at about 15 before buying.

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