On Sunday, “60 Minutes” released a damning report on Lumber Liquidators and its practices at factories in China.
Following the report, analysts at Piper Jaffray said the report was worse than they had expected.
Analysts at Morgan Stanley have responded to the report by downgrading shares of Lumber Liquidators to “Equal Weight” and removing its price target on shares. Previously, the firm had had an $US85 price target and “Overweight” rating.
And so in short, Morgan Stanley isn’t really sure what Lumber Liquidators shares are worth anymore.
Morgan Stanley said the “60 Minutes” report now creates a binary outcome for Lumber Liquidators shares: legal risks and the ensuing sales fallout define the downside risk, while the potential for an overblown legal risk and media scrutiny could result in no financial fallout for the company.
But the big change in Morgan Stanley’s view on Monday morning? They thought quality issues were behind Lumber Liquidators.
From Morgan Stanley’s note:
If there were any prevailing quality issues in LL’s supply chain, we had assumed they were largely behind the company. The quality allegations are 2-3 years old and the company has seemingly taken many actions to resolve them. But, after watching the 60 Minutes episode, we are concerned that quality issues may still exist. We recognise we are reacting to one interpretation of the situation, one that is clearly being influenced by investors who have a stake in the outcome. But, nevertheless, the piece suggests that the legacy issues may not have been fully resolved. It is this uncertainty that is pushing us to the sidelines.
The firm added that much of what it heard last night was not exactly new, as issues related to formaldehyde first surfaced about 2-3 years ago. In response, Lumber Liquidators has “significantly beefed up its compliance,” in Morgan Stanley’s view, and the firm adds that “something would really have to be awry if there were still product quality issues, in our view.”
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