Both successful investors with great track records Chuck Royce (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) have at one time purchased La-Z-Boy. I do not mean actual La-Z-Boy furniture, what they bought was part of the company itself. Chuck and Mario still maintain a stake in the company; the paths diverge, however, with one recently increasing his stake and the other reducing.
Will Mario have better returns with his more recent purchases, or will Chuck’s recent reduction prove more lucrative?
Displayed in the Gurufocus.com graphic below, Chuck Royce (Trades, Portfolio) owned shares of LZB in 2009. As the price rose, starting in 2012, Chuck started reducing his position. Although he still owns shares, it is a fraction of the amount he owned prior to the price increase.
On the other hand, Mario Gabelli (Trades, Portfolio) has been increasing his stake in La-Z-Boy. Near the same time Chuck was reducing in 2012 Mario started increasing. As the outlook for the future of the company has been improving, Mario has found LZB more and more attractive.
Do good economics indicate good price? Will Mario’s recent purchase be a better decision than Chuck’s selling? In order for us to determine this, we must study the company.
A 1-Star Business Predictability ranked manufacturer, distributer, and retailer of furniture, La-Z-Boy Inc. may not be the easiest to value. A company with volatile earnings may make attaching a value to those earnings difficult. How deep will the next recession be? Are we at the peak or trough of the sales cycle? Answers to those questions will be rough estimates, no matter how educated the analyst.
In order for us to make our rough estimate of future returns, let us examine a couple concepts important to value investors.
We start by examining revenue and comparing it to price. Plotted on the chart below in green, one will notice from 1996 to 2001 revenue was increasing. This time was an expansion phase for LZB. This expansion proved to be too quick. With foreign competition from China, the economics proved difficult. The result was declining sales for nine years ending in 2009.
The astute value investor must notice the other line plotted on this chart, Market Capitalization. Market capitalization is the total value of the equity. This is the price of the business. What the value investor must recognize is both how much the price fluctuates and how it compares to the revenue received by the business. In good times, when revenue is increasing and loans are easy to access, the blue price line increases towards the green line. In bad times, when revenue is decreasing and margins suffering, price declines away from the revenue line. In 2009, a value investor could have purchased $1.3 Billion in sales for $49 Million.
Another method value investors use to determine value is by studying the price of assets. Similar to the revenue line, this green line represents the total value of LZB assets. Property, plant, equipment, cash, inventory and others are included in total assets. Once again, in good times assets increase and in bad times they decrease. Price often coincides with these movements.
The astute value investor, however, has to identify when this normal behavior is out of its normal range. It is clear using Gurufocus’s Interactive Charts, 2009 was a time when LZB assets were priced at a major discount.
The question we ask today, is how much are those assets priced today? How much is revenue priced today? If you expect credit to soon become difficult to access, perhaps Chuck’s recent selling was the right decision. If you believe credit to continue to be easy to access and sales and margins will continue increasing, perhaps you side with Mario’s recent purchase. Only time will tell which Guru will win this battle.
What are your thoughts on the recent Guru battle? Complete this assignment and share your thoughts in the comments section below.
Thanks to Gurufocus.com for providing La-Z-Boy Inc. Interactive Charts.
