Building safe profits with a solid Canadian stock
This analyst details the kind of company investors should look for when the market wobbles and fills the bill with a solidly built Canadian stock.
This is a story about a hardware store that doesn’t sell you mitre saws, wood filler or garden hoses.
In fact, it’s not really a hardware store at all.
But it is a very successful company. What’s more, it’s a company that has boldly gone where many other Canadian firms stub their toes. Into the United States, where it has a strong foothold.
In short, Richelieu Hardware (TSX-RCH) is a good Canadian stock to own in an uncertain market, says Mr. Sudhir Dhawan.
We can’t be certain about the stock market in the months ahead, says this independent analyst (and the Rubik’s cube of Greek debt isn’t exactly breeding confidence).
That makes a strong, cash-rich company a safe place to be.
He tells the story in Investor's Digest of Canada. And he gives his readers a very precise definition of a “safe-haven stock.”
Safe-haven stocks
Many market pundits are of the opinion that the S&P/TSX Composite Index may go up another five to 10 per cent, says Mr. Dhawan.
“Some think the market needs a correction or will just move sideways until the economy, especially in the U.S., shows some real improvement.”
Yet others are convinced that things will get much worse, “with a steep decline testing the 2009 lows.”
This analyst doesn’t take sides. “My crystal ball never worked so I won’t even go there. Some nimble investors may wait and sell at the top, but I even lack that skill,” he says modestly.
“At the same time, I never believe in getting out of the market completely to wait out a correction.” Instead, he looks for safe havens.
“These are simple businesses meeting the everyday needs of consumers and doing it very well.”
They will retreat with the market, but they will come back. “They make money even in difficult times, though maybe not as much, and they must pay a dividend. At the same time, they have growth potential and the financial and managerial strength to take advantage of opportunities.”
In his eyes, Richelieu Hardware meets each of these qualifications.
Not the worst of times
Headquartered in Montreal, Richelieu makes, imports and distributes the materials for furniture and kitchen cabinets, home and office accessories and decorative products.
It has 31 distribution centres in Canada and 18 in the U.S. Its customers are furniture and cabinetmakers, woodworkers, renovation chains and your local hardware store. And there are over 40,000 of them.
“It might seem like the worst of times for a company depending on home and commercial renovation, but Richelieu has many things going for it,” the analyst tells us.
It is number one in its specialty in North America. And it is building long-term strength by means of small acquisitions and internal growth.
What’s the best part of this approach? “This growth has always been financed by internal cash flow.” The company has no debt.
Richelieu has over 1,200 workers and 60 per cent of them are shareholders. So is fund company Mawer Investments of Calgary, which holds 11 per cent of the shares. CEO Richard Lord owns 6.5 per cent.
That’s a fair number of insiders that have a personal interest in the success of the stock.
All-important cash flow
Although housing in Canada has picked up lately, it remains shaky in the U.S. And fiscal year 2009 was not kind to Richelieu as revenues declined. Still, the company made some agile adjustments.
While revenue from cabinet manufacturers fell, sales to retail hardware chains went up. With tight inventory control and a reduction in receivables, Richelieu increased its all-important cash flow by $16 million.
And it raised the dividend. The company only began paying a dividend in 2002, but it has increased it steadily over the past eight years.
The first quarter is inevitably the weakest for Richelieu, as you might expect of the winter months. Yet the 2010 results were solid. Sales were up 10 per cent in Canada, although still down in the United States.
But Richelieu did acquire a hardware distributor in Syracuse, New York and it will soon open another distribution centre in Raleigh, North Carolina.
Mr. Dhawan doesn’t expect another big acquisition soon, he tells his Investor's Digest of Canada readers, but he does see “huge potential for U.S. growth.” Richelieu only serves about a dozen states now. As the economy turns around down south, more opportunities will open up.
For the coming year, this analyst sees low double-digit growth for Richelieu. The stock has climbed fairly steadily over the past year and stands at $24.10. It yields 1.5 per cent on the $0.36 dividend.
Many things go into making a stock a safe haven. But if we look at the unseemly scramble to bail Greece out of debt, one asset certainly stands out these days.
Cash, cash and more cash.
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