What happened
Shares of Lumber Liquidators Holdings (LL) traded down more than 9% on Monday after the company was downgraded to underweight by Morgan Stanley. It's been a seesaw last year for Lumber Liquidators, with the stock up more than 15% and down more than 30% in the past 12 months, but Morgan Stanley sees little reason for excitement in the months ahead.
So what
Lumber Liquidators is in a period of transition following a midyear earnings report that fell short of expectations. The company's founder has mulled trying to take it private, but it seems more likely current management will be tasked with growing foot traffic to stores and building the retailer's digital presence.
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In a note out Monday, Morgan Stanley's Simeon Gutman expressed skepticism the turnaround will happen quickly and lowered his rating on Lumber Liquidators from equal weight to under. He also cut his price target for the stock to $5, implying there is a good bit of downside risk to the current $8.50 price.
Gutman is worried that consumer demand is decelerating, which he says could make it difficult for Lumber Liquidators to generate growth. 2020 earnings will also come up against difficult year-over-year comparisons, which could further zap investor enthusiasm.
Now what
Before this downgrade, the company had enjoyed positive momentum, lifting its full-year 2019 operating margin forecast to 2.1% to 2.4% from 1% to 1.4% in December after the U.S. trade representative ruled that some of its products can be excluded from tariffs.
Even if Gutman is being too pessimistic about how low the stock price can go, it is hard to see Lumber Liquidators in the quarters to come generating the growth needed to jump-start the stock and get it soaring higher. This is a turnaround best watched from the sidelines.
