In an environment where top line growth is scarce and companies have to expand their sales by making acquisitions, this stock is a rarity – it has organic growth. The stock discussed below is Richelieu Hardware Ltd. (RCH-T).
Quebec-based Richelieu manufacturers and distributes specialty hardware and complementary products such as kitchen and bathroom cabinets and handles to more than 70,000 customers in the residential and commercial renovation industry.
In terms of its customer base, sales are mainly to manufacturers. During the first nine months of fiscal 2016, 85 per cent of the company's sales were to manufacturers and 15 per cent of sales were to hardware retailers and renovation superstores.
In terms of geographical sales breakdown, Canada remains its largest exposure. However, the company continues to steadily expand its U.S. footprint via tuck-in, or smaller, acquisitions. Since the start of this year, the company has purchased four U.S. companies. Management has been able to successfully identify, acquire and integrate acquisitions.
Richelieu's fiscal year end is Nov. 30. The company is anticipated to report its fiscal 2016 year-end results in January.
Key features of the investment thesis are as follows:
- Strong management team. Richard Lord, the president and chief executive officer, is not promotional. He is focused on execution and has a proven track record of delivering on his promises.
- Consistent, strong long-term growth profile. The numbers speak for themselves. Sales for the past nine years, including during the recession, are as follows: $750-million (2015), $647-million (2014), $587-million (2013), $566-million (2012), $524-million (2011), $447-million (2010), $416-million (2009), $428-million (2008) and $420-million (2007).
- Impressive organic growth. Sales in the third quarter grew 10.4 per cent year over year, of which 7.9 per cent was organic, or internal, growth and 2.5 per cent was acquisition growth. In the second quarter, sales grew 13.9 per cent compared with last year, of which 11.7 per cent was organic and 2.2 per cent was from acquisitions. Lastly, in the first quarter, sales jumped 18.6 per cent year over year, with 16.8 per cent as organic growth and the balance from acquisitions.
- Margin improvement potential. Earnings before interest, taxes, depreciation and amortization (EBITDA) margins have been under pressure because of weakness in the Canadian dollar. However, management believes margins will expand in the months ahead owing to the gradual price increase that they have put through.
- Solid profitability. Return on equity was 17.5 per cent in fiscal 2015, and has been in the teens since fiscal 2005, ranging from a low of 13 per cent in 2009 to a high of 18.4 per cent in 2005.
- Strong balance sheet. The company reported $20.9-million of cash on its balance sheet at the end of August, and little debt, $3.8-million.
Risk to consider:
- Currency headwinds. A rising U.S. dollar and euro, relative to the Canadian dollar, raises the company’s costs and affects profitability.
Returning capital to shareholders
The company pays shareholders a quarterly dividend of 5.33 cents per share. This equates to an annualized dividend yield of just less than 1 per cent. Management has announced a dividend increase in January of each year going back to the year 2010.
The company have been active in its share buyback program, repurchasing more than one million shares during the first nine months of the fiscal year.
The stock is trading at a price-to-earnings multiple of 19 times the consensus fiscal 2018 estimate. This is relatively in line with its three-year historical average. During this time period, the stock has traded principally between 17 times and 22 times.
There are two analysts whom cover this stock, one has an "outperform" recommendation and $30 target price, the other has a "sector perform" recommendation and $28.50 target price, implying a potential double-digit price return of up to approximately 20 per cent.
The two firms providing analyst coverage are Scotia Capital and National Bank Financial.
The consensus EPS estimate is $1.07 for fiscal 2016, and forecast to rise 11 per cent to $1.19 in fiscal 2017, and increase to $1.30 in fiscal 2018. Estimates have been fairly stable. At the start of the year, the consensus EPS estimate was $1.11 for fiscal 2016 and $1.19 for fiscal 2017.
The stock price has been in a multiyear uptrend. Year to date, the share price is up approximately 10 per cent. However, in recent months, the share price has been under pressure, falling roughly 8 per cent since the beginning of August.
There is initial, strong downside support at $24, which is close to its 200-day moving average.
The bottom line
Back in June, 2015, I recommended Richelieu to readers when the share price was $20.83. A little more than a year later, in July, 2016, the share price closed at $27.70, a 33-per-cent price move. Given the recent share price weakness, I am reiterating my buy recommendation.
If the downtrend remains intact, dragging the share price down into the $24 range, this may represent an attractive buying opportunity for long-term investors.
As always, I strongly encourage readers to consult a financial adviser and to do their own proper due diligence before taking any investment action.
The author does not personally own shares in the security mentioned in this story.