Morgan Stanley: Lumber Liquidators 'On Sturdier Ground'

Simeon Gutman of Morgan Stanley upgraded shares of Lumber Liquidators Holdings Inc (NYSE: LL) on Monday to Overweight from Equal-weight with a price target raised to $85 from a previous $60.

Gutman notes that Lumber Liquidators sales slowdown in 2014 is "temporary," partially due to weather, a slower housing activity in the first of the year, self-inflicted supply-chain issues and tough comparisons.

"Yes, the top-line was on hyper-drive in 2013, helped by some unusual items (Hurricane Sandy in the Northeast, foreclosure and remodel activity in the Southeast)," Gutman wrote. "But, the 2014 comp decline (minus three percent) should represent the floor for this business with approximately 10 percent square footage growth and powerful store remodel/relocate benefits."

Gutman adds that his internal checks in non-weather impacted regions indicate a "healthy" mid-single-digit comp growth while checks in regions impacted by weather reveal that comps grew at a "sequential improvement" since August.

The analyst expects the company to see a 4 percent comp growth in 2015 and 2016 as home prices (which correlate "strongly" to company comps) continue to drive higher.

A 3 percent home price growth in 2015 translates to a mid-single-digit comp growth for the company, according to Gutman.

Finally, the analyst suggests that the company has plenty of levers for future gross margin expansion including a recovery from prior disruptions, positive mix shifts within product categories, lower transportation expenses and gains in higher margin moldings, accessories and tiles.