by Marc Bastow | October 24, 2012 2:58 pm
Next time you’re wandering around your house and you happen to glance at the floor, let your mind wander to a potential investment you might not have thought about before: Lumber Liquidators (NYSE:LL).
Sure, go ahead and snicker: You’ve seen the commercials, many starring PBS’s This Old House star Bob Vila. But since giving up shilling for Sears (NASDAQ:SHLD), Vila has been touting a company whose stock price has soared nearly 500% over the past five years and 233% this year alone.
What on earth is going on here? Plenty, and it’s all good.
The company started in 1993 when now-Chairman Tom Sullivan, a building contractor, started buying excess wood other companies didn’t need and reselling it from the back of a trucking firm’s yard in Stoughton, Mass. Lumber Liquidators soon found its niche in reselling hardwood flooring and opened its first store in January 1996 in West Roxbury, Mass. It sold 150 square feet of flooring on the first day.
A second store opened in Hartford, Conn., later that year, and the company now has over 200 locations in the U.S., with more scheduled to open this year. To take advantage of better distribution channels, Lumber Liquidators moved its headquarters from Boston to Colonial Heights, Va., in 1999 and is now located in Toano, Va.
The big secret to Lumber Liquidators’ success is how it acquires its raw material: It negotiates directly with mills to buy an entire year’s production, eliminating the need for any middleman and passing the savings on to customers. The company boasts of having the largest inventories of pre-finished and unfinished hardwood floors in the industry.
Lumber Liquidators offers wood brands for both residential and commercial construction, including in-house brand Bellawood. In addition to solid and engineered hardwood floors, it also carries laminate flooring, bamboo flooring, cork flooring and butcher blocks.
The model works very well. While Home Depot (NYSE:HD) and Builders FirstSource (NASDAQ:BLDR) offer the whole gamut of products for builders and do-it-yourself’ers, Lumber Liquidators does wood flooring. Period.
The result is a lean machine that’s growing at a steady clip with little of the baggage associated with the trappings of that growth. Revenues have increased 178% since 2005, standing at just over $681 million in the last (2011) fiscal year. Third-quarter earnings released today show a company still marching upward. It comfortably beat its top-line estimates and lifted its revenue guidance for full-year 2012 to over $750 million in sales.
Profits are also growing nicely. In this case, at a 145% clip over that same seven-year period, and now stand at just over $26 million, or around 93 cents per share. That’s about a 4% net margin, but third-quarter earnings pushed that number up to just over 6%. LL’s new guidance is for nearly $1.59 per share for the full year. So the success continues.
You would expect investors to pay up for that kind of steady growth, and they do. At just over 45x earnings, Lumber Liquidators stock might appear expensive, but you clearly get what you pay for in this case.
What I like most though, is that growth is coming in without the cost: LL keeps a wonderfully clean balance sheet, with no long-term debt to drag down earnings. Cash flow to this point can clearly carry the company’s capital spending needs. Lumber Liquidators doesn’t yet offer a dividend, and I wouldn’t expect one soon, particularly if the stock keeps climbing.
This is one company that clearly runs a little under the radar, but you shouldn’t just step over it any more.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he did not hold a position in any of the aforementioned securities.
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