Lumber Liquidators (LL) reported blowout earnings again this morning, reporting $0.57 per share in net income versus expectations of only $0.42. In addition, LL's revenue growth of 22.5% year over year meant $230.4 million in revenue was also a large beat on the $215 million analysts expected. This is the same story that has repeated for several quarters in a row now, dating back to the beginning of last year. LL grows revenues and net income at a blistering pace and the analysts who cover the stock are somehow surprised each time. I don't cover stocks for a living and I know that LL's "guidance" is a joke that is designed to illicit exactly the kind of response to the earnings report that we are seeing once again this morning. As of this writing, shares are trading up better than 14%. It is a classic case of under promise and over deliver. The thing is, it usually doesn't work for so many consecutive quarters as it isn't difficult to see the pattern.
In addition to the headline numbers, there were some impressive underlying metrics that LL reported:
· Comparable sales increased a whopping 15.2%
· Net income nearly doubled from the year-ago quarter
· Gross margin was 40.4%, up 310 basis points over the year-ago quarter
· SG&A decreased 90 basis points to 29.2%
· Operating margin increased 390 basis points to 11%
· Cash and equivalents rose $8.5 million over the December quarter
Following the first quarter report, LL updated its full-year outlook as follows:
· Revenues in the range of $913 to $942 million, up from $885 to $920 previously
· Comparable store sales increasing in the mid-to-high single digits, up from mid-single digits previously
· 25 to 35 new stores
· Earnings of $2.10 to $2.35 based on 28 million shares, up from $1.90 to $2.15 previously
While no one can deny the quarter was terrific (again), we should break down the results in order to determine what they actually mean in terms of valuing the stock. At the current price of over $75, LL now has a market cap of $2.05 billion. Taking LL's guidance range of $2.10 to $2.35 in earnings for 2013 on 28 million shares outstanding (slightly more than is currently outstanding), we get an implied net income forecast of $59 million to $66 million. Therefore, LL's current forward PE multiple is a staggering 38 on the high side and 34 on the low side. Granted, the company is growing net income at an incredible pace but that is a nosebleed valuation for any company, regardless of how quickly they are growing.
The current market cap represents greater than 2 times sales as well, far in excess of historical standards for LL. Obviously, increased valuation of earnings is warranted given LL's torrid growth in the past 18 months but I would argue the stock is even more expensive now than it was following the December quarter's results. Given LL's revenue and profit growth, I would argue a multiple of perhaps 20 is warranted. Multiples over 30 almost exclusively end poorly for shareholders over the long term except for a few stocks like Amazon (AMZN) where investors completely ignore profitability. LL is no such stock as we saw in 2011 when shares dropped to $14 on reduced revenues and profit.
No one can say for sure when it will happen but I have to think Wall Street's surprise every single quarter at LL's results won't last forever and at 38 times forward earnings, LL must continue to growth at 30%+ each year indefinitely to maintain that kind of multiple. Obviously, at some point, LL's efficiencies gained since Rob Lynch became CEO will become comparables and LL's growth will slow significantly. That should begin happening this year as its massive sourcing improvements essentially finished up in 2012. As LL begins to comp against these improvements, torrid growth will be nearly impossible to come by. Therefore, towards the end of this year or early next year, I think LL's multiple will come back down to Earth. Given that the company is forecasting up to $2.35 in earnings this year, a multiple of 20 would imply a price around $47, not $80. Of course, I'm pretty sure internally LL knows $2.35 is a joke and that the company will blow past this "estimate" as it has every quarter for the past year and a half. Analysts that cover the company either have no idea what they are doing or suffer from a lack of patter recognition abilities because every new earnings beat is a shock. However, there is no scenario I can think of where LL can be worth $80 currently. Given a reasonable forward multiple of 20, LL would need to earn $4.00 in 2014; that is not going to happen.
We have seen many instances of hugely overvalued stocks that can persist for a long time before reality sets in but it always ends the same way; losses for shareholders. LL will end the same way; it is just a matter of when. This is a great company that is executing brilliantly on all fronts but it is just too expensive. After LL's stock actually becomes reasonable again, if you have the chance to buy below $50 or so, jump on it as this company is terrific. But there is no reason to pay a dime for a nickel.