Why La-Z-Boy Looks Undervalued Ahead of Earnings

Macro Tailwinds

The U.S. housing market continues to post healthy numbers and the latest consumer data shows sustained optimism about the economy. Investors looking to exploit housing’s multiplier effect, or the tendency for home sales to stimulate additional spending, should be encouraged. The combination of these two factors are likely to provide tailwinds for companies tied to housing.

As one of the world's leading residential furniture producers, La-Z-Boy Incorporated (NYSE:LZB) is one company that stands to benefit. La-Z-Boy manufacturers and retails reclining chairs, wood furniture, and accessories through its network of company-owned and independent dealers.

The furniture retailer is set to report earnings next Tuesday, let's take a closer look at how the company is positioned in this favorable environment.

Targeting Top-Line Growth

La-Z-Boy has consistently posted solid year-over-year revenue growth since the financial crisis. However, growth has stagnated a bit over the past few quarters. To be fair, let's look at how peer companies Ethan Allen (NYSE:ETH), Bassett Furniture (Nasdaq:BSET), and Haverty Furniture (NYSE:HVT) have performed over the same period:

As illustrated above, growth has been mixed for LZB’s peers as well. This helps ease concerns over issues specific to La-Z-Boy, but what is management’s plan to return to more normalized growth? As outlined in the recent earnings calls, the company continues to build on several strategic initiatives:

Marketing Focus

Management is working to scale an improved marketing strategy that has proven to be effective in several markets. It also plans to increase marketing spend as well as improve its advertising channel mix.

Product Improvement

In addition, there is a focus on improving the product mix to enhance margins. New product innovations that hold wider appeal across customer segments should also help the top-line.

Expanding Market Share

La-Z-Boy should gain market share as well, as it expands its distribution. For example, the company recently invested $20 million to acquire nine retail stores in Pennsylvania.

Operational Efficiency

While it works to boost top-line growth, management has shown its effectiveness in improving operational efficiency. The company has increased its productivity and improved its procurement strategy. This has played out in an upward trending EBITDA margin:

Recent Stock Performance and Valuation

While margins have been trending upwards, La-Z-Boy’s stock has been trading mostly side-ways over the past several months.

However, the stock may gain clarity after next week's earnings report. Using finbox.io's valuation models let's see how our fair value estimate compares to LZB’s current trading levels.

Applying Wall Street estimates, our valuation models assumes that revenue takes a slight step back (-1%) in fiscal 2017 given the recent quarterly declines. But through aggressive marketing, continued demand for housing, and increased consumer optimism, revenue growth jumps back to the mid-single digits thereafter. For EBITDA, crediting management's focus on efficiency, margins continue to expand modestly.

The assumptions above calculate an average fair value estimate of nearly $33.00 per share across twelve valuation models.

<img src='http://res.cloudinary.com/finbox/image/upload/v1497367975/LZB_Fair_Value_xbyj87.jpg' alt= ‘LZB Finbox.io Intrinsic Value Estimate’>
^{LZB Fair Value Source.}

Compared to La-Z-Boy’s last closing price of approximately $28.00, our fair value estimate implies almost 18% upside. Wall Street’s consensus 1-year target is even higher at $34. Furthermore, this doesn't consider the stock's 1.6% dividend yield which provides even more total return potential.

La-Z-Boy Conclusion

A housing market on strong footing and confident consumers present tailwinds for La-Z-Boy Incorporated. Quarterly sales growth has stagnated recently, but management is addressing concerns with aggressive marketing, new products, and a more favorable product mix. Assuming these tailwinds and tactics can bring back the company's growth to historical rates, the stock looks to have about 18% upside with additional yield from its dividend.

Value investors looking for tangential exposure to a healthy housing market may want to take a closer look at La-Z-Boy before earnings next week.

^{Note this is not a buy or sell recommendation on any company mentioned.}