Money Smarts: A Reader Points Out ‘A Gem Of A Stock’
It’s impossible to keep track of all the investment opportunities out there. That’s why I welcome questions from readers asking my opinion on securities that I haven’t reviewed in the past. Sometimes the reader suggestions are duds – story stocks with no history of profits and a perilously weak balance sheet. But occasionally someone draws my attention to a gem of a stock that has flown under my radar.
One such email came in last month. Reader Alex S. asked: “Any opinions on Richelieu Hardware Ltd. (TSX: RCH)? It looks like a well managed Canadian firm but I’m not certain on it’s stock value.”
I had heard of Richelieu but I had never researched it in detail. When I did, I was impressed by what I learned.
The Montreal-based company is an importer, distributor, and manufacturer of specialty hardware products. It sells a huge range of products, from kitchen cabinets to lighting supplies to power tools. Think of walking into a Home Depot store – that gives you some idea of the variety Richelieu offers. The entire inventory consists of more than 110,000 items.
The company has 37 distribution centres in Canada and 31 in the eastern and southern U.S. It has two manufacturing plants in Canada. One is Cedan Industries Inc., which specializes in making of a wide variety of veneer sheets and edgebanding products (carpentry trim). The other is Menuiserie des Pins Ltée., which manufactures components for the window and door industry and a broad selection of decorative mouldings.
The company has two revenue streams, selling both to manufacturers (80,000 customers) and to retail customers.
This may not be a glamourous business but the numbers are solid. First-quarter 2017 results (to Feb. 28) showed sales of $195.9 million, up 3.7 per cent from the same period in the prior year. Of that, $164.9 million was sales to manufacturers.
Net earnings attributable to shareholders came in at just under $12 million ($0.20 per share, fully diluted), compared to $10.9 million ($0.18 per share) in 2016.
In Canada, sales grew by 4.5 per cent. That represented a 2.8 per cent increase in the manufacturers market and an 11 per cent gain in the retailers and renovation superstores market. In the U.S., sales went up 7.7 per cent in U.S. dollar terms, with the manufacturers market showing a 7.9 per cent increase and a 3.6 per cent increase in the retailers and renovation superstores market.
One of the attractions of this business is its pristine balance sheet. As of the end of February, the company had cash reserves of $36.4 million while total debt was only $3.8 million. Of that, $0.3 million was in long-term debt and $3.5 million in short-term debt representing balances payable on acquisitions and financing contracts for equipment.
Equity attributable to shareholders totalled $401.5 million as at Feb. 28, compared with $394.3 million on Nov. 30, 2016, the year-end for fiscal 2016. That was an increase of $7.2 million. As at Feb. 28, the book value per share was $6.93, up by 1.8 per cent over Nov. 30.
Richelieu grows by acquisition. Its latest deal was to acquire Weston Premium Woods Inc. of Brampton Ontario. Weston distributes a range of materials, decorative products, and hardwoods targeted to a customer base of kitchen and bathroom cabinet, storage and closet, home furnishing, and office furniture manufacturers, as well as residential and commercial woodworkers. This acquisition represents additional sales of approximately $60 million on an annual basis. No terms were disclosed.
During 2016, the company completed four acquisitions in the U.S.
The stock pays a dividend, although not a very hefty one. The quarterly payout is $0.0567 per share ($0.2268 per year) for a yield of 0.7 per cent. On the plus side, the company has a recent history of raising its dividend every year.
Richelieu is also buying back stock, purchasing just over one million shares at a cost of $23.1 million in 2016.
About the only negative is the share price. The price/earnings ratio is 27.7 on a trailing 12-month basis, which is not cheap. The stock hit an all-time high of $31.16 on April 24 before pulling back slightly.
Given the high share price, I suggest purchasing half your position now and waiting for a pullback to add the balance. Ask your financial advisor if it is suitable for your account.
Disclosure: I do not own shares in this company.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.