La-Z-Boy has had an impressive run over the past six months as its shares have beaten the S&P 500 by 9.2%. The stock now trades at $43.09, marking a 15.2% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy La-Z-Boy, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.We’re happy investors have made money, but 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.
Why Do We Think La-Z-Boy Will Underperform?
The prized possession of every mancave, La-Z-Boy (NYSE:LZB) is a furniture company specializing in recliners, sofas, and seats.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, La-Z-Boy’s 3% annualized revenue growth over the last five years was sluggish. This was below our standard for the consumer discretionary sector. 
2. 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 typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what 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.
3. 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 2.5%. Although this projection indicates its newer products and services will spur better top-line performance, it is still below average for the sector.
Final Judgment
La-Z-Boy falls short of our quality standards. With its shares beating the market recently, the stock trades at 13.6× forward price-to-earnings (or $43.09 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere. We’d recommend looking at KLA Corporation, a picks and shovels play for semiconductor manufacturing.
Stocks We Would Buy Instead of La-Z-Boy
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