There are investors who have a taste for numbers and access to a database of stocks; they like to run “screens,” finding potential picks that stand out from the pack.
Richelieu Hardware Ltd. may not appear at the top of any of those lists. It is reasonably priced, but not cheap, with a price-to-earnings ratio around 15. Its dividend, yielding about 1.6 per cent, is solid but not overly generous. It is, in short, not a “screaming buy.”
Consider it a soft-spoken polite “buy” instead. With its pristine balance sheet, solid history of acquisitions, and track record of earnings growth, Richelieu Hardware is, as one analyst says, “a buy-and-forget-it stock – a great long-term holding.”
The Montreal company’s name suggests a chain of hardware stores, but that’s not what Richelieu Hardware does. Instead, the bulk of its “specialty hardware” sales (85 per cent) are to manufacturers of cabinets, windows, doors and furniture. The remainder goes to home-improvement retailers, particularly supercentres from Rona, Home Depot and Lowe’s.
All told, the company has more than 60,000 customers across Canada and in the United States; a map of Richelieu’s 60-plus locations forms a crescent that dips into the U.S. upper Midwest and along its East Coast.
That leaves plenty of room for Richelieu to continue its southward expansion. The company has made 10 acquisitions of small specialty manufacturers since late 2009, half in the U.S. and nearly all below $10-million, even as the home-improvement industry seemed uncertain.
That helped contribute to U.S. sales that gained 52.9 per cent in 2011 to $100.5-million (U.S.), nearly one-fifth the company’s overall revenue. (Just 1 per cent of the U.S. sales were to retailers, suggesting lots of room for growth.)
The company’s growing presence in the U.S, where job and housing numbers are slowly improving, is seen by Scotia Capital analyst Anthony Zicha as a hedge against a “a weakening Canadian market.”
Richelieu pulled off its deals by taking advantage of its strong cash flow, which has ranged from $25-million (Canadian) to $55-million, after capital expenditures, in each of the last four years. No debt is used in the building of this company: the $1.2-million on the balance sheet on Nov. 30 was the largest year-ending figure since 2006. Cash on hand totalled $29.1-million.
That enables Richelieu to pursue its steady growth strategy and still pay a dividend; the company raised it 9.1 per cent to 12 cents per quarter last month. That represents about one-quarter of expected 2012 profits.
What are we to expect, then? Mr. Zicha believes Richelieu’s U.S. acquisitions will continue this year, but he does not account for them in his models. His 2012 estimate of $1.97 is about 6 per cent above the company’s 2011 level. Leon Aghazarian of National Bank Financial forecasts a similar $1.99.
At recent prices around $30, that means Richelieu trades at 15 times current-year expectations; it’s been a number of years since it’s traded at much more than 16, so investors shouldn’t hope for multiple expansion to drive the share price.
Indeed, in a world where analysts’ “buys” and target prices typically imply gains of 25 per cent or more, Mr. Zicha and Mr. Aghazarian can only muster “neutral” and “sector perform” ratings on Richelieu Hardware.
Mr. Zicha has a one-year target price of $32.50 and a two-year target of $36. Mr. Aghazarian, responsible for the previously mentioned “buy-and-forget-it” comment, has a $33 target price.
That, however, is capital appreciation of roughly 10 per cent, with a 1.6-per-cent dividend yield layered on top. More so than many, Richelieu Hardware seems capable of delivering on expectations, providing long-term upside, and showing little evidence of significant downside.
For conservative investors, that might constitute a buy worth screaming about, after all.