Shares of potential turnaround story Lumber Liquidators Holdings Inc. (NYSE: LL) were up 13.7% at 2:40 p.m. EDT on May 10, following an upgrade by the analyst at Wedbush Securities who covers the company. According to a note on his decision to upgrade the stock, analyst Seth Basham increased his stock price target from $22 to $27, on expectations that the company is positioned for growth, after a number of tough quarters struggling under negative publicity related to Chinese-made laminate flooring it no longer sells.
Today's move up helped Lumber Liquidators' shares recover most of the big drop following its earnings release in early May, and as of this writing shares are up nearly 57% so far in 2017.
Image source: Lumber Liquidators.
In general, Basham makes some good points about where Lumber Liquidators stands today. The company's reputation has improved consistently over the past few quarters, as time helps distance it from the (mostly disproved) allegations that it was selling a potentially hazardous product. And this has helped lead to a steady recovery, with same-store sales (comps) up three quarters in a row.
At the same time, the company is still burning cash, and faces significant legal risk, with ongoing securities and product litigation.
On the cash front, Lumber Liquidators does have a decent buffer of cash and revolving credit, and is set to generate positive cash flows in coming quarters, after major inventory investments ahead of its busiest season in the spring. There was also a shot of positive news on the legal front last quarter, with the company announcing that it was taking an $18 million charge ahead of a potential settlement in its biggest legal challenge related to the Chinese-made laminate.
There's still risk with Lumber Liquidators, since it is still losing money, and the legal issues are unresolved. But the risk-reward balance has indeed improved in recent quarters, as comps growth has helped improve margins and cash flows are set to improve as well. Furthermore, the potential for a settlement of the Chinese-made laminate lawsuits would be a major step forward for the company and its shareholders.
Add in a generally strong economy, with improving jobs numbers and a strong housing market, and there are multiple positive factors for the company. But as long as legal issues and negative cash flows remain, there's still above-average risk that investors shouldn't ignore.
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