Hardwoods Distribution Inc.
Revenue (2020) $1.2 billion
Profit (2020) $37.6 million
Three-year share price gain 231%
P/E ratio (trailing) 13.9
Even more so than before the pandemic, we live in an HGTV world. Construction and reno shows “seem to be on every channel these days,” says Faiz Karmally, vice-president and chief financial officer of Hardwoods Distribution Inc.—which now prefers to go by its acronym because it has evolved beyond generic wood products.
Within an increasingly sophisticated North American building sector, the company has boosted its sales roughly sevenfold over the past decade. The climb in HDI’s share price has been even more astonishing—from about $3 in late 2011 to more than $40 recently.
Still, investor perceptions of smaller-than-large-cap stocks often take time to catch up with new prospects. Without saying directly that HDI’s shares remain cheap by many metrics, Karmally says, “I think our story has been underappreciated.”
Consider products first. A decade ago, most of HDI’s revenue came from hardwood plywood and lumber. Now, they account for about one-third, with the rest generated by more value-added segments such as stair parts, mouldings, doors and decorative elements—the stuff with “high-end, shiny surfaces,” as Karmally says.
Then there’s market diversification. The company has eight distribution centres across Canada and 75 in the United States. Roughly two-thirds of HDI’s sales are to small and mid-sized industrial manufacturers—think of a local cabinet factory that employs 50 people.
The remaining third goes to big-box hardware stores and so-called professional dealers, which sell to builders. But there’s little risk of a dominant competitor emerging. Much of the building business is still regional and local, Karmally says, and HDI is “generally bigger than our competitors and our customers.”
The discipline and strategy extend to deal-making. HDI does grow organically, but it has also made 13 acquisitions since 2010, including two big U.S. ones: Rugby Architectural Products in 2016, which added US$282 million in annual sales, and Novo Building Products this past August, which added US$640 million.
HDI CEO Robert Brown started at the company as CFO in 2004, earning the top job in 2016. Karmally, who joined in 2014, says small “tuck-in” acquisitions were sometimes completed “off the side of the CEO’s desk” in the old days. Now, there’s a senior vice-president of acquisitions and a long-term strategy.
Macro factors are favourable for HDI, too. Interest rates remain near historic lows, the U.S. housing market has been undersupplied for a decade, and millennials have entered their prime home buying and upgrading years. /John Daly
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