Lumber Liquidator's (LL, Financial) stock price is on a downward trajectory ever since Whitney Tilson (Trades, Portfolio) gave his bearish presentation on the company. His main concerns were the company's product quality and sourcing of illegal wood. Until recently, most of the sell-side analysts didn't agreed with his opinion. Out of 16 analyst covering the company, eight were bullish and had buy ratings, while the other eight had hold recommendations. None of the analyst had a sell or underperform rating on the stock. However, post CBS's "60 Minutes" expose it seems like sell-side is realizing the problem with levels of formaldehyde (a cancer-causing chemical) in Lumber Liquidators' Chinese-made laminate flooring.
A Morgan Stanley analyst has recently threw in the towel and removed his price target on the company. His earlier price target was $85 for the company's stock. In his latest report he mentioned, "something would really have to be awry if there were still product quality issues, in our view." The following is excerpt from Morgan Stanley's recent note to clients:
"If there were any prevailing quality issues in LL's supply chain, we had assumed they were largely behind the company. The quality allegations are 2-3 years old and the company has seemingly taken many actions to resolve them. But, after watching the 60 Minutes episode, we are concerned that quality issues may still exist. We recognize we are reacting to one interpretation of the situation, one that is clearly being influenced by investors who have a stake in the outcome. But, nevertheless, the piece suggests that the legacy issues may not have been fully resolved. It is this uncertainty that is pushing us to the sidelines."
Morgan Stanley is predicting binary outcome for the stock:
1. Downside case: If CBS and short seller's version are correct, legal risks from customer lawsuits and the ensuing sales fallout could cause material damage to the company
2. Upside case: If the company's version regarding its product quality is correct and concerns regarding product quality are overblown than the stock can see substantial upside given its low valuations
Post CBS expose, the company is trading at 14 times FY2015 consensus EPS estimates. According to sell side estimates the company's topline is expected to grow 11.50% in the current year and 12% next year.
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