(LL) Lumber Liquidators: The Best Way to Play the Rebounding Housing Market

The U.S. is in the midst of a robust housing recovery.

There’s no denying it… The evidence has been mounting for several quarters now. Home prices are on the rise and the number of distressed houses on the market is dropping steadily. In some key real estate markets, there are even reports of shortages of available homes on the market.

Investors have taken note and are buying up shares of stocks that are directly affected by the recovery. Traditional homebuilder stocks are trading higher, along with suppliers such as companies that sell building supplies and home furnishings.

One company that’s poised to take advantage of the trend is Lumber Liquidators (NYSE: LL).

Lumber Liquidators is a niche player in the building material sector. It focuses exclusively on hardwood flooring and related accessories.

The company is large enough to compete on the highest levels (booking contracts with the blue-chip developers), but still small and nimble enough to represent a tremendous amount of growth potential.

To understand just how much growth is in store for Lumber Liquidators, let’s first take a look at the broad housing environment.

Housing Market in Sustained Uptrend

Demand for homes in key markets across the U.S. has been rising, with two primary drivers pushing the action:

  • Individuals are buying homes as employment improves and interest rates remain attractive.
  • Institutional investors are buying distressed homes in bulk, renovating and renting properties.

Perhaps the most dramatic influence right now is the private equity company The Blackstone Group (NYSE: BX), which has plowed billions of dollars into distressed homes across the U.S.

The firm’s strategy is to buy foreclosed homes in bulk and then deploy an army of contractors and skilled laborers to renovate the properties. These homes are then rented out, netting positive cash flow for the firm and its investors.

While the cheapest homes have already been purchased, Blackstone isn’t planning on shutting down its buying program any time soon. The company recently added $2.1 billion to its credit line, giving it plenty of additional capital to purchase and renovate distressed homes.

Blackstone isn’t alone in its strategy of buying single family homes and renting them out to individual tenants. Silver Bay Realty Trust (NYSE: SBY) is a real estate investment trust (REIT) that was formed last year. Silver Bay put together a tremendous amount of capital to become the largest publicly traded REIT focusing exclusively on single family homes.

On a personal note, I had a conversation this week with a developer in the Las Vegas area. The small private company my acquaintance works for recently bought an entire neighborhood worth of lots to build out. The firm already has excess demand for the homes that are in the building stage, and is having trouble finding new developments to buy in order to repeat the process.

Home Depot and Lowes Earnings Confirms Demand

This week’s earnings announcement from Home Depot (NYSE: HD) and Lowe’s Companies (NYSE: LOW) also confirms the strong demand for building material.

On Tuesday, Home Depot hit a new all-time high after beating earnings estimates with an 18% increase in profit. Management raised guidance for upcoming quarters based primarily on…. you guessed it… the ongoing housing recovery.

Here’s a quote from the company’s CEO, Frank Blake: “[W]e continue to see benefit from a recovering housing market that drove a stronger-than-expected start to the year for our business.”

Lowe’s followed with its own report on Wednesday, booking a solid 14% increase in profit. Investors continue to bid the shares of both stocks higher as confidence in the housing recovery grows.

Lumber Liquidators – The Optimal Choice

Of all the companies mentioned, though, Lumber Liquidators is the best opportunity to take advantage of the new housing boom. Not only does it offer tremendous growth potential, but the company is small enough to continue to grow at a fast clip for many months (or even years) to come.

The management team has done a good job of generating growth, by building out a quality line of products and developing strong relationships with large building conglomerates as well as small individual contractors.

A good bit of Lumber Liquidator’s business comes from large homebuilders that buy flooring in bulk. But it is important to note that the company also gets a tremendous amount of business from the remodeling industry.

With large companies like Blackstone buying billions of dollars’ worth of distressed homes, there is a huge amount of renovating that needs to be done across the country. While Lumber Liquidators doesn’t sell directly to Blackstone or Silver Bay, the company is most definitely benefitting from the myriad of contractors who are employed by these REITS.

On April 24, Lumber Liquidators announced stellar earnings for the first quarter. Even though the first quarter is seasonally weak for builders, Lumber Liquidators netted a 22.5% increase in sales and a 92.5% increase in earnings.

The company also reported an increase in comparable store sales of 15.2%. This shows that while the company is benefitting from opening new stores across the country, the performance of its existing stores is also a significant factor driving revenue growth.

The strong quarterly report was just another data point in a series of healthy quarters for the company. Take a look at the chart below. It shows acceleration in both revenue and earnings growth over the last several quarters.

Looking forward, analysts are expecting 44% growth in earnings this year. While this is definitely a strong growth rate, it’s even more important to note those same analysts continue to raise their estimates for this company.

It seems that Wall Street can’t keep up with the actual growth, as Lumber Liquidators continues to surprise investors with even stronger growth than expected.

This is exactly what you want to see from a company that is capturing market share in a growing sector. A virtuous circle of increasing estimates and rising investor sentiment can push a stock higher by many multiples.

Over the next year, analysts should boost their 2014 estimates, with $3.50 being a strong possibility. If investors are willing to pay 35 times forward earnings for this dynamic growth company, the stock would naturally trade at $122.50 – representing a 38% gain from current prices.

Of course if Lumber Liquidators continues to post 92% profit growth, these estimates will turn out to be very conservative and you could realize a triple-digit profit.

Now is the time to pick up shares of this tremendous growth stock. There is no debate… the housing industry is growing stronger by the day.

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Read more on Lumber Liquidators, U.S. Housing Market at Wikinvest

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