Dorel Industries Inc. investors have been spinning their wheels as the broader market roars ahead, and analysts say the stock can only gain traction after the company proves that it can deal with challenges.
Shares of the Montreal-based company, which sells Quinny strollers, Schwinn bikes and ready-to-assemble furniture, are up less than 1 per cent so far this year and down by about 7 per cent over the past 12 months. The broader S&P/TSX composite has gained about 18 per cent in the past year.
Dorel saw a drop in sales and profit last year, when bad weather affected its bike business and it struggled with increased competition for its baby products. The company acknowledged recently that its 2013 performance was "disappointing," blaming the weather and the economy, but also its own "less than perfect execution."
Since that mea culpa in early March and the company's pledge that first-quarter earnings would improve by 20 to 25 per cent year-on-year, the stock has jumped about 10 per cent and now trades near $41. Still, many are waiting for proof.
"It's a bit of a wait-and-see situation, where investors are interested in actually seeing results improve, as opposed to buying expectations," said CIBC World Markets analyst Mark Petrie.
Dorel is expected to report its first-quarter earnings on Thursday, which Mr. Petrie expects will be "modest … with the headwind of a slow start to the retail year."
He is one of five analysts with a "hold" or equivalent recommendation on the stock, while two see it as a "buy" or equivalent, according to S&P Capital IQ. The analyst consensus price target over the next year is $35.97.
Mr. Petrie has a $39 price target on Dorel. The shares reached a 52-week high of $45.05 a year ago, but have since slipped to as low as $31.20 in August, when the company reported a drop in profit for the first half of 2013.
Dorel's bicycle business, which accounts for about 38 per cent of sales, was hurt by a late start to spring last year in its key markets across North American and Europe. The company is now restructuring the division to save $6-million (U.S.) annually.
Its baby products business, which accounts for 41 per cent of sales, has been hurt by increased competition and challenging economic conditions, particularly in Europe. Sales in its home furnishings business, representing the remaining 21 per cent of sales, have been flat.
Dorel has grown through acquisitions over the years and TD Securities analyst Derek Lessard said that might be the answer to its suffering share price.
"Short of a meaningfully accretive acquisition, we see little in the way of potential catalysts capable of driving the shares materially higher in the near term," he said in a recent note, reiterating his "hold" recommendation. "We are likely to become more positive on the stock once we are convinced that industry trends are improving and that some minor internal execution issues … have been ironed out."
Not all analysts are as skeptical.
RBC Dominion Securities analyst Sabahat Khan has an "outperform" and a $43 (Canadian) price target on Dorel, saying the company has strong brands and an attractive dividend, yielding about 3.3 per cent.
"Free cash flow can continue to support valuation and dividend growth," he said in a recent note. "While [Dorel] can have lumpier earnings than most, we believe it remains among the more undervalued names in the Canadian consumer space."