Over the past six months, La-Z-Boy’s stock price fell to $36.65. Shareholders have lost 7.3% of their capital, which is disappointing considering the S&P 500 has climbed by 9.7%. This may have investors wondering how to approach the situation.
Is now the time to buy La-Z-Boy, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think La-Z-Boy Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons we avoid 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. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, La-Z-Boy’s 6.1% annualized revenue growth over the last five years was weak. This was below our standard for the consumer discretionary sector.
2. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict La-Z-Boy’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 7.4% for the last 12 months will decrease to 4%.
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. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We see the value of companies helping consumers, but in the case of La-Z-Boy, we’re out. Following the recent decline, the stock trades at 13.6× forward P/E (or $36.65 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at one of our all-time favorite software stocks.
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