Over the last six months, La-Z-Boy’s shares have sunk to $33.70, producing a disappointing 15.9% loss - a stark contrast to the S&P 500’s 15.6% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
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Why Do We Think La-Z-Boy Will Underperform?
Despite the more favorable entry price, we're cautious about La-Z-Boy. Here are three reasons you should be careful with LZB and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, La-Z-Boy’s sales grew at a sluggish 6% compounded annual growth rate over the last five years. This was below our standard for the consumer discretionary sector.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect La-Z-Boy’s revenue to rise by 1.9%. Although this projection indicates its newer products and services will fuel better top-line performance, it is still below the sector average.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, La-Z-Boy’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
La-Z-Boy falls short of our quality standards. After the recent drawdown, the stock trades at 10.5× forward P/E (or $33.70 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.
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