The buy-and-hold approach championed by Intelligent Investor disciplines seems to be a relic of years absent Bloomberg terminals and 24-hour news.
That approach should be revised, because it's unwise to tie up funds in an investment that is hemorrhaging value based upon on some mythical, promising future outcome. New-school buy-and-hold has an investment time horizon of at least six months and no greater than a year, with a readiness to take profits once full valuation is obvious.
It's important to develop a basic macro thesis that, if it were to change in any way, should ring a bell to exit the position if the future outlook of the business would be below expectations. The market would wake up to this and begin to price in a less-than-perfect picture. By the time this happens you will be like Jay-Z, on to the next investment opportunity.
Take a look at the conditions for La-Z-Boy (LZB).
Consumer confidence measures can't possibly get any worse.
The hiccup in economic output in the U.S. and Europe will create a window of more favorable raw material, import, and transportation costs. Considering year-over-year margin comparisons will be to the first half 2011, with the inflation outbreak, earnings growth rates should appear stronger for many companies in early 2012 (barring Great Recession Part II).
And although furniture sales are approximately 23% below their peak hit in January 2007, sales for the last five months have risen year over year. That's impressive given the disappointing data on housing and homeowners continuing to forego major home-related purchases. The numbers suggest that a replenishment cycle is ongoing, and could strengthen as the Fed does all it can to keep borrowing costs low and the unemployed are put back to work.
Why La-Z-Boy and why now?
La-Z-Boy has almost 830 points of distribution in the U.S. through its furniture gallery stores and floor space in an array of retailers, from independent dealers to department stores. The distribution model is stronger than La-Z-Boy's competitors. For example, Ethan Allen primarily sells home furnishings through its retail network.
In addition, the minute aspects of the business are intriguing.
There's significant consolidation of excess warehouse and manufacturing capacity since 2007.
Total debt is down to $35 million presently from $151 million at the end of 2007 and the company was net cash positive to the tune of $75 million at the end of its most recent quarter.
The retail business is finally on track to turn a profit amid improved marketing and selling techniques, as well as the repositioning of the store network.
And La-Z-Boy's earnings recovery story has taken a step back in the past two quarters due to raw material and transportation price pressures. I expect those pressures to ease, allowing for better realization to the bottom line of price increases for product lines and product shipment.
In addition, the market hasn't priced in acceleration in earnings in each of the next two fiscal years, fueled by many of the factors I have outlined. La-Z-Boy shares trade on a forward P/E multiple of 8.9x (Ethan Allen: 12.7x), about five times less than where the earnings growth rate could reach in the current and next fiscal years, and a mere 4.2x forward EV/EBITDA (Ethan Allen: 5.8x).
To top it off, La-Z-Boy has $2.09 p/s in cash, and if the story I constructed unfolds, a dividend reinstatement will be in order given the unnecessary need to ramp up capex (it has ample manufacturing capacity with its new Mexico facility on line).