Market Overview

Sympathy Companies In Play Following Lumber Liquidators, Tractor Supply Disappointments

Related LL
Lightning Round: Jim Cramer Advises His Viewers About Trivago, Mattel, And More
Lightning Round: Jim Cramer Weighs In On Lumber Liquidators, ADP And More

Lumber Liquidators’ (NYSE: LL) and Tractor Supply’s (NASDAQ: TSCO) horrible guidance Wednesday has put several sympathy stocks in play.

Home Depot (NYSE: HD) shares are down three percent and Lowe’s (NYSE: LOW) shares have sold off 2.8 percent on sectoral weakness concerns.

Deutsche Bank analyst Mike Baker thinks the sell off is justified and cut estimates for both companies below Wall Street’s consensus. The research report explained, “With HD/LOW and LL all related to housing in some capacity, we calculate a positive correlation to comps of between 56%-57% since 2008. Similarly, the exposure to outdoor leads to a positive correlation of 49%-56% for HD and LOW versus TSCO on the comp line.”

Related Link: Guidance Conference Call From Lumber Liquidators Fails To Allay Concerns

The note also pointed out that the Midwest, Northeast and upper Mid Atlantic were the hardest hit regions for Lumber Liquidators, which account for almost 40 percent of Home Depot’s and Lowe’s stores.

Regarding Home Depot’s valuation, Baker wrote, “Our price target is $85, which is based on 16x our 2015 EPS estimate. This is a slight premium to our long term growth rate forecast of 15%, with 8% coming from the EBIT line and the rest from buybacks. We see a faster EBIT growth rate for LOW due to their lower margins, which leave more room for upside. The biggest downside risk for HD is exposure to housing markets. The biggest upside risk in our view is better than expected operating margins, particularly from SG&A leverage.”

Regarding Lowe’s valuation, Baker wrote, “Our price target of $54 is based on 17x our 2015 EPS estimate. This is in line with our long term EPS growth forecast of 17%, with 9% from EBIT and the rest from buybacks. The biggest downside risk is LOW’s exposure to housing turnover, in our view.”

Latest Ratings for LL

Dec 2017Moffett NathansonInitiates Coverage OnBuy
Oct 2017Morgan StanleyMaintainsEqual-Weight
May 2017OppenheimerUpgradesPerformOutperform

View More Analyst Ratings for LL
View the Latest Analyst Ratings

Posted-In: Deutsche Bank Mike BakerAnalyst Color Price Target Analyst Ratings


Related Articles (HD + LL)

View Comments and Join the Discussion!