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Dividend, growth, low debt: Small-cap has it all

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Barry Calhoun Photography

Sometimes it's the quiet ones that can surprise you.

That appears to be the case with Richelieu Hardware Ltd., a lightly traded specialty hardware company that has been steadily growing its market share – and making its investors a lot of money along the way.

The Montreal-based company's stock is trading near a record high and has risen more than 200 per cent since the depths of the last recession, outpacing the overall Toronto market and many of its peers in the hardware and home renovation industry.

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"I think this company is one of Canada's best kept secrets," said Michael Bowman, portfolio manager at Wickham Investment Counsel Inc., which owns Richelieu shares.

Richelieu imports, distributes and manufacturers products such as lighting, hinges and decorative hardware for kitchens and bathrooms. About 84 per cent of its current sales are to manufacturers and the rest to hardware retailers and renovation superstores.

The company has grown through the acquisition of about 50 companies across North America over the past two decades. Lately, it has been particularly focused on buying businesses in the United States to take advantage of the recovering housing market there.

Mr. Bowman said he believes the company has good management and likes its U.S. growth strategy. Its nearly debt-free balance sheet and steadily rising dividend also makes him a confident investor.

"I think these guys have their heads screwed on straight," Mr. Bowman said.

Other investors seem to agree. The stock has risen by about 25 per cent over the past year and hit a record of $51.30 on April 3, after the company reported strong first-quarter sales growth, particularly in the expanding U.S. market. That's up nearly 38 per cent from a 52-week low of $37.26 around this time last year.

Richelieu said sales grew 8 per cent in the first quarter ended Feb. 28, which historically is its weakest period of the year. Sales grew 3.8 per cent in Canada and 10.6 per cent in the United States in the period. The U.S. accounted for 27.6 per cent of total sales in the quarter.

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Despite Richelieu's recent momentum and the fact that it is approaching a market capitalization of $1-billion, only two research analysts – with National Bank Financial and Scotia Capital – currently cover the stock. Both analysts have an "outperform" recommendation and an average price target of $55.50 over the next year.

"It doesn't get as much attention as it should," said Peter Hodson, head of research at 5i Research, an independent stock analysis firm. He said that's likely because the company doesn't raise a lot of equity, which attracts analyst attention.

What stands out for Mr. Hodson is how well the stock did during the last recession. While many companies saw a dramatic drop in sales during that time, Richelieu's decrease was a modest 3.9 per cent in 2009 compared with a year earlier.

"If that is the worst the economy can throw at this company, then it's not one I would be particularly concerned about," Mr. Hodson said about the stock.

National Bank Financial analyst Leon Aghazarian recently raised his target to $54 from $51, citing the company's steady and reliable growth trajectory. "The most appealing part about the name at the moment is its U.S. growth," he said. "I don't see a major risk with the name."

That's even though the stock is expensive, trading at about 17 times next year's earnings.

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"You're paying for quality," Mr. Aghazarian said.

Scotia Capital analyst Anthony Zicha recently hiked his target to $57 from $49, citing the company's proven growth strategy.

"We believe that Richelieu's continued focus on market development and introduction of product innovations should support long-term growth and market share gains. Furthermore, we expect the company to leverage its scale, acquisitions and product mix. These initiatives should translate into enhanced margins," Mr. Zicha said in a note.

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About the Author

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More


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