Can Lumber Liquidators Keep Going After Last Week's 15% Pop?

By Markets

Image source: Lumber Liquidators

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There's buyout buzz surroundingLumber Liquidators(NYSE: LL)again. That was enough to send shares of the struggling hardwood flooring retailer 14.6% higher last week, but the gains will be hard to sustain if the rumor mill chatter doesn't pan out.

The takeover talk suggested that private equity was looking to pay as much as $30 a share for Lumber Liquidators. That's a tall order for a stock that began the week trading in the mid-teens, a point that some used social to pounced on.

If a buyout was to materialize it would certainly make sense that it would come from the ranks of private equity firms. These are the savvy cash-backed entities that could take Lumber Liquidators and give it a couple of years to restore its brand away from quarterly scrutiny before hitting the market again. There aren't too many home improvement retailers that would chance taking on the negative sentiment that Lumber Liquidators brings to the table since being called out for selling China-sourced laminates with noncompliant levels of formaldehyde. However, a $30 takeout price when you have to go all the way back to last October to find the last time that it wasn't trading in the teens seems like a bit of a stretch.

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Lumber Liquidators' fundamentals would need to improve dramatically to justify that kind of markup, and the bitter twist is that if the fundamentals were to improve it wouldn't need a suitor.

Wood chucks

Last week's speculation was enough to send the stock to its highest levels of 2016, but the stock still has a long way to go to get back to where it was before a critical segment on 60 Minutes disrupted its momentum.

Lumber Liquidators initially rejected the claims that aired in the report, but investors and hardwood flooring shoppers weren't buying it. Lumber Liquidators eventually shook up its executive ranks and stopped selling Chinese-made laminate flooring products. Federal regulators eventually closed its investigation on Lumber Liquidators this summer, but customer hesitation remains. Net sales have fallen for five consecutive quarters with comps taking even bigger hits. It has posted losses for six straight quarters.

There are now more than 375 locations, so if and when shoppers come back it could be pretty powerful stuff. However, until comps turn positive and losses get reversed into profits it's hard to hop on a stock that's being kept up by buyout speculation.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Lumber Liquidators. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.