Skip to main content

Dorel Industries Inc. has fallen on hard times. Its profits are down and its share price has wilted 40 per cent over the past 18 months. Analysts, none of whom have a buy recommendation on the stock, are expressing no enthusiasm.

So is all the bad news priced into the stock?

Investors will know more on Aug. 3 when the Montreal-based maker of Cosco booster seats, Schwinn and Cannondale bikes and Signature Sleep mattresses, among other products, reports its second-quarter results.

But, for now, it is interesting that the shares have been rising over the past month. They have rebounded 14 per cent from five-year lows, suggesting some investors see a deal here following an ugly first quarter.

When Toys “R” Us, one of Dorel’s customers and a high-profile victim of online retailing, announced earlier this year that it would shutter its U.S. stores and liquidate inventory, Dorel booked an additional impairment loss of US$12.5-million in the first quarter.

The charge knocked 29 US cents from Dorel’s first-quarter earnings a share, which missed analysts’ expectations. Profit declined 47 per cent to US$4.7-million, or 14 US cents a share.

Management played down the loss of Toys “R” Us, noting that its U.S. sales through the retailer accounted for just 3 per cent of Dorel’s total annual revenue. They argued that the lost sales would eventually shift to other retailers. It isn’t as if the United States is going to have fewer bikes, they point out, simply because one large retailer is no longer selling them.

“There will be some market disruption in the short term with Toys 'R' Us liquidation sales. The situation should stabilize by the second half and we are confident we will see these sales being made up elsewhere,” Martin Schwartz, Dorel’s chief executive officer, said during a call with analysts.

Analysts aren’t sharing this confidence, though. TD Securities and Canaccord Genuity downgraded their recommendation on the stock to the equivalent of sell. Those who maintained the equivalent of “neutral” recommendations cut their target prices on the stock to reflect dwindling optimism. There are no buy recommendation on the stock, according to Bloomberg.

The reason for the lack of enthusiasm?

Derek Dley, the Canaccord Genuity analyst who slashed his target price to $22 from $33 in May, sees challenges beyond the Toys “R” Us setback. In Dorel’s sports division, which includes bikes, he believes sales are hampered by soft activity within mass market retailers.

He also noted that sales within the company’s juvenile division, which includes car seats and strollers, may be deteriorating in Chile as online competition increases. And, third, production setbacks in China along with higher commodity costs, could continue.

His sell recommendation, he concluded in his May note, follows a “lack of near-term catalysts, and the weakening sales and margin trends in two of the three divisions.”

But if you find it hard to resist overwhelmingly negative sentiment, then Dorel could be worth taking a flyer on.

The first reason: The stock is cheap. The share price recently plumbed Mr. Dley’s $22 price target, which is also RBC Dominion Securities’ worst-case scenario.

And even following the recent uptick in the share price, the stock trades at just 10.3 times trailing earnings and 11.5 times estimated earnings – a rare deal in a market that most observers believe is expensive.

The second reason: You get paid to wait. The company pays a dividend of 30 US cents a quarter, for a yield of 6.3 per cent.

Sure, there’s risk. Companies that are struggling can cut their payouts to save cash. But it seems unlikely in the case of Dorel. The company has maintained the same quarterly payout for six years. And while the payout ratio has shot higher recently, it is expected to subside to 74 per cent this year and to 56 per cent in 2019, which looks like a safe trend.

Lastly, there is something in what management says about shifting sales to other retailers. In Canada, it sells its products through Canadian Tire and Walmart, suggesting Dorel’s brand strength transcends the vagaries of bricks-and-mortar retailing.

And if online retailing looks like a threat, keep in mind that Dorel sells through Amazon.com, too.

Report an editorial error

Report a technical issue

Editorial code of conduct

Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
DII-B-T
Dorel Industries Inc Cl B Sv
+2.37%6.92

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe