Not surprisingly, there are many technical factors that help determine the value of a company. Some of the most popular analyses include quarterly growth projections, P/E ratios, cash flows, debt/earnings balances, enterprise value (EV), and EBITDA (earnings before interest, taxes, depreciation, and amortization). Because of this, analysts spend innumerable hours deciphering what they believe to be the true market value of public entities. However, investment bankers and researchers tend to skip what is arguably one of the most important valuation factors: public perception. While social beliefs are not a traditional metric, like cash flows, public opinion can nonetheless impact valuations. In only a matter of hours, public perception can either double a company’s value or halve it. Unfortunately for Lumber Liquidators (LL), the American public inspired the latter.
In March 2015, 60 Minutes published a story claiming that Lumber Liquidators, a domestic hardwood flooring company, had violated a plethora of consumer health and safety laws. Specifically, 60 Minutes discovered that Chinese-made laminate flooring, sold by Lumber Liquidators, contained Formaldehyde (a carcinogen linked to cancer). A series of independent lab tests confirmed that some Chinese-made laminates did contain illegal levels of Formaldehyde that surpassed California standards. Understandably, news of the tainted flooring outraged Lumber Liquidators’ customers, shareholders, and regulators.
While there is no denying Lumber Liquidators’ guilt, questions remain as to whether the company’s executives were complacent, or simply ignorant; did they know Lumber Liquidators was purchasing toxic flooring from China? Obviously, Lumber Liquidators executives deny all alleged wrongdoing, declaring they knew nothing about the Formaldehyde-tainted wood. Moreover, senior management has sidestepped its involvement by questioning the validity of scientifically validated lab tests. While it has not been proven, the seemingly more believable explanation is that executives were indeed aware of Lumber Liquidators’ practices, specifically the continued purchase of toxic flooring, and may have even approved this strategy in an attempt to cut costs and boost earnings.
Needless to say, these regulatory accusations have absolutely decimated the company’s stock price. Just over a year ago, Lumber Liquidators stock traded at over $90. As of Thursday’s close, Lumber Liquidators shares traded at just $33.65, which is only slightly above its recent low of $27.15 (which occurred after the 60 Minutes report went viral). This represents a 60% decrease in shareholder value. Regardless of all analyses, “nobody” on Wall Street could have predicted a crash of this magnitude.
To add even more intrigue to this story, it turns out that Lumber Liquidators stock fell from about $70 to $55 in July 2014. Given the company was already experiencing downward momentum, stemming from disappointing earnings results, one could easily surmise that poor performance inspired Lumber Liquidators’ executives to cut costs. If Lumber Liquidators’ stock price is any indicator of public opinion, most people seem to think this is true; only time will tell who, if anyone, is at fault. Nevertheless, the fact remains: Lumber Liquidators will experience great difficulty in selling its floors, and its stock.