The Floor for Lumber Liquidators Holdings Inc (NYSE:LL)

Lumber Liquidators Holdings Inc (NYSE:LL) has been the poster child for toxic flooring since the 60 minutes segment, but Home Depot Inc (NYSE:HD) and Lowe's Companies, Inc. (NYSE:LOW) were/are selling similar flooring.  LL and HD has already taken steps to discontinue, and LOW is being pressured to as well, but LL is clearly the poster child for this so far.  Eventually the investigations are likely to spill into HD and LOW too, but for now what is bad is considered worse at LL.

Let me start with the numbers, and the EPS references are to already revised numbers that include the problems LL will face in the year ahead, and the lower margins as a result of the discontinued flooring.

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As I typed this LL traded with a market cap that was approaching 1/2 of its recent revenue. 

EPS growth is expected to be bad this year, but to rebound next year.

Still, current EPS for 2015 based on revised expectations is 19x, and that falls to 7.5x in 2016 if analysts are right and price remains the same.

Based on that data, should price remain the same?

Well, there is a long list of issues.  The claims, class actions, insurance problems, and now the resignation of the President of the company all are negatives, margin pressures have caused EPS expectations to come down, and worries about client retention existed early on, but the worries of losing market share to HD and LOW may have abated recently as those companies are also coming under scrutiny for selling flooring that could be toxic.

Ultimately, it is my opinion that LL is probably guilty of selling flooring that had higher than permissible toxicity; this was almost surely done unwittingly because it seems that only a very small % had this problem, so channel checks could have missed this small % of bad products, but the company has already discontinued purchases, and the analysts have already come out with major revisions.

I think this very well could be the floor for LL.

This is speculative, the stock moves aggressively, more negative news could surface, but the exit of the President could be spun as a good thing (it could have been handled better) and the price of the stock today assumes that the insurers will deny all claims.  The worst may be built into the stock officially.

Be careful with this, but I like LL very much here and I expect the stock to be trading at 15x earnings by the middle of 2016.  If you do the math on that estimate, it implies a double within 12-15 months.

I will update clients to the progress and the changes I see regularly, but I cannot commit to updating public articles every time changes in my point of view take place.

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