In This Article:
La-Z-Boy trades at $41.98 per share and has moved almost in lockstep with the market over the last six months. The stock has lost 7% while the S&P 500 is down 3.3%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in La-Z-Boy, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think La-Z-Boy Will Underperform?
Even though the stock has become cheaper, we're swiping left on La-Z-Boy for now. Here are three reasons why there are better opportunities than LZB and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, La-Z-Boy’s 3.2% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark 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 1.8%. While this projection indicates its newer products and services will spur better top-line performance, it is still below average for the sector.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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. Unfortunately, La-Z-Boy’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of La-Z-Boy, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 12.5× forward P/E (or $41.98 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d suggest looking at our favorite semiconductor picks and shovels play.
Stocks We Like More Than La-Z-Boy
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