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On today’s Breakouts report, there are 63 stocks on the positive breakouts list (stocks with positive price momentum), and 35 securities are on the negative breakouts list (stocks with negative price momentum). Energy and gold stocks continue to charge higher, representing over 70 per cent of the securities on the positive breakouts list.

Discussed today is a stock that appeared on the negative breakouts list last week. It is an oversold home improvement stock that has seen its share price collapse 24 per cent from its record closing high reached just two months ago on Feb. 9 - Richelieu Hardware Ltd. (RCH-T).

High-quality home improvement stocks have been decimated in recent months with mounting concerns about softening housing activity as interest rates rise. For now, this sector remains out of favour with selling pressure continuing to drag these stocks lower.

However, Richelieu is a stock to watch as it is technically oversold and its valuation is becoming increasingly inexpensive relative to historical levels. Further price weakness may represent a potential buying opportunity for longer-term investors. This is a stock that has delivered long-term value to its shareholders.

A brief outline on Richelieu Hardware is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Quebec-based Richelieu Hardware is a home improvement stock. The company manufactures and distributes specialty hardware and complementary products, such as kitchen and bathroom cabinets, servicing the residential and commercial renovation industry. It has more than 100,000 customers and supplies major retailers such as Home Depot, Lowe’s and Costco. Management is focused on growth, both organic and acquisition, and management has a disciplined acquisition strategy.

Sales in Canada represented approximately 66 per cent of total sales in fiscal 2021 with the balance coming from the United States (Richelieu’s fiscal year-end is at the end of November). At the end of fiscal 2021, the company had 47 distribution centres and two manufacturing facilities located in Canada, as well as 48 distribution centres in the U.S.. In the first-quarter of fiscal 2022, 40 per cent of total sales stemmed from the U.S.. A key goal by management is to increase its U.S. sales to over 50 per cent of total sales.

The company reported explosive growth during the pandemic, which will make year-over-year growth a challenge. Prior to the coronavirus, management delivered steady growth with improving EBITDA margins over the years. Richelieu reported revenue of $1.44-billion in fiscal 2021, $1.13-billion in fiscal 2020, $1.04-billion in fiscal 2019, $1-billion in fiscal 2018, $942.5-million in fiscal 2017, $844.5-million in fiscal 2016, and $749.7-million in fiscal 2015. The EBITDA margin was 16.3 per cent in fiscal 2021, 13.7 per cent in fiscal 2020, 11.9 per cent in fiscal 2019, 10.6 per cent in fiscal 2018 and 10.9 per cent in fiscal 2017. The company reported earnings per share of $2.51 in fiscal 2021, $1.50 in fiscal 2020, $1.18 in fiscal 2019, $1.17 in fiscal 2018, $1.15 in fiscal 2017, $1.07 in fiscal 2016 and 99 cent in fiscal 2015. Return on average equity has consistently been in the mid-teens, with fiscal 2021 a stand-out year with ROE of 23.3 per cent, compared to 16.2 per cent in fiscal 2020, 13.7 per cent in fiscal 2019, 15 per cent in fiscal 2018 and 16.3 per cent in fiscal 2017.

There is seasonality in its business with its first quarter typically the weakest quarter.

Investment thesis highlights

  • Strong and proven management team with president and chief executive officer Richard Lord at the helm.
  • Inexpensive valuation relative to historic levels.
  • Prudent acquisition strategy. Richelieu completed five acquisitions in fiscal 2021.
  • Oversold. The stock is oversold from a technical analysis perspective.
  • Potential risks to consider: 1) rising interest rates are keeping investors out of home improvement stocks (these stocks may remain out of favour until rates stop going up); 2) challenging year-over-year earnings growth comparisons given the exceptional growth realized in the prior year; 3) rising costs from inflation; and 4) supply chain constraints.

Industry conditions

To gain insights about industry challenges and outlooks, below are comments from company leaders in the home improvement industry.

Home Depot Inc. (HD-N): home improvement retailer. Year-to-date, the share price is down 27 per cent.

On April 7, at the JP Morgan annual retail conference, chief financial officer Richard McPhail said, “What customers tell us now is I was able to purchase a home, but I couldn’t find what worked for me. I had to buy what I could buy. And so that, coupled with the fact that my balance sheet has never been healthier, means I’m going to remodel. And so -- what’s interesting is all of this home activity, regardless of interest rates, seems to be feeding into remodeling more than it ever has. If I can’t find a home, chances are I’m going to remodel. Again, my balance sheet has never been healthier. And so our customers tell us, ‘Hey, you know what? I can’t move right now. And so I’m not going to so I’m going to remodel because I know that I will recoup a return on whatever investment I put in my home. It’s one of the safest investments I can make.’”

Lowe’s Companies Inc. (LOW-N): Home improvement retailer. Year-to-date, the stock price is down 22 per cent.

On April 6, at the JP Morgan annual retain conference, chief financial officer David Denton remarked on a key concern by investors – potentially softening demand in a rising interest rate environment. He said, “We went back and did an analysis in understanding in times in which rates were rising and the economy was strong, how did that affect home improvement demand? Was it going to soften the demand? And actually, we saw it the opposite. When rates were rising and the economy was strong, actually home improvement demand actually increased a bit. Now listen, this is a whole new game that we’re playing. No one has come out of a pandemic before. But again, back to maybe a fundamental change in the marketplace, is the home has just become a much more critical asset to everybody. I look at my own business in North Carolina. We had 6,500 people in our home office. We now have probably 3,000 people back into the home office, theoretically full-time, if you will, I’ll put that in quotes with a lot of flexibility. They’re in the office, they enjoy being there, but they’re not there five days a week. The home is still a critical asset that they’re spending much more time in. So if you think about wear and tear, so maintenance costs and requirements are going up. People are reconfiguring their home to make sure it’s effective to be able to work there efficiently. People with schoolchildren are still -- a lot of schools from home still at some level. So the investment thesis around the home is really strong and actually it’s probably going to be consistently strong over the next period, several years for certain, from our perspective.”

Masco Corp. (MAS-N): A supplier of plumbing (faucets, bathtubs, shower doors, etc) and decorative architectural products such as kitchen and bathroom cabinets and Behr paints. Year-to-date, the share price is down 30 per cent.

On the fourth-quarter earnings call held on Feb. 8, president and chief executive officer Keith Allman remarked, “As we exited 2021, supply chain challenges have marginally improved. However, shipping delays and labor constraints remain a challenge. We experienced high single-digit inflation overall in 2021 and expect inflation to remain persistent and to increase in 2022 as higher raw material, freight and labor costs flow through our P&L.” The CEO’s 2022 outlook was positive, “The repair and remodel market remains strong and leading home improvement indicators are robust. Home price appreciation was 18 per cent in December and existing home sales increased over 8 per cent compared to prior year. Each of these metrics has a strong correlation with our sales on a lagged basis. Based on these assumptions and our expectation that we will continue to gain share and outperform the market, we anticipate Masco’s growth to be in the range of approximately 4 per cent to 8 per cent, excluding currency for 2022.”

Masonite International Corp. (DOOR-N): A manufacturer of interior and exterior doors for the repair and renovation market and new construction market. Year-to-date, the share price is down 36 per cent.

On the fourth-quarter earnings call held of Feb. 22, president and chief executive officer Howard Heckes noted, “A tight supply of housing stock and rising home values in North America are supporting both the new construction and repair and remodel demand. It could provide upside for volumes in 2022.”

Chief financial officer Russ Tiejema remarked on near-term challenges facing the company, “We expect net sales growth of 6 per cent to 10 per cent versus 2021, or 7 per cent to 11 per cent excluding foreign exchange. With respect to adjusted EBITDA drivers in 2022, we anticipate that inflation will remain a substantial headwind. We assume our raw materials costs will remain elevated and yield an annual inflation rate in the low to mid-teens, with year-on-year increases heavily weighted to the first half given the trajectory of inflation across 2021. Inflation on wages and benefits as well as on logistics are expected to come in at mid-single-digits.”

Quarterly earnings results

On April 7, the company reported its first-quarter fiscal 2022 financial results for the quarter ended Feb. 28. Earnings came in below expectations and the stock price dropped.

Sales in the first quarter were $384.5-million, up 29 per cent year-over-year, of which 16 per cent was from organic, or internal, growth and 13 per cent was acquisition growth. However, sales fell short of the Street’s forecast of $393-million. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $53.7-million, up a remarkable 41 per cent year-over-year, but below the consensus estimate of $59-million. The company’s EBITDA margin expanded to 14 per cent, up from 12.8 per cent realized during the same quarter last year. Earnings per share came in at 53 cents, up 43 per cent year-over-year but well below the consensus estimate of 64 cents.

That day, the share price fell 2.6 per cent on high volume with over 873,000 shares traded. This is well above the three-month historical daily average trading volume of approximately 273,000 shares.

On the earnings call, the president and chief executive officer Richard Lord addressed a question about demand in the face of high inflation and rising interest rates, “All the markets that we are servicing whether it is residential or commercial, I think that our customers are still quite busy. While consulting our salespeople, they keep saying us that the customers are probably busy until the end of the year, at least. We never know about 2023, it’s too early. But we’re learning though that the shipping period has been shortened. The shipping a kitchen cabinet three months ago would take eight months. Now the delay would be four to five months. It means that it’s improving, but also there are many projects that have been postponed as well that will be coming back to the market…The governments and institutions, they have huge budgets actually for infrastructure, which generates some pretty good business… And the RV market, that’s a new market for us... We even have added a new sales force just to cover the RV market in the U.S. because this is a huge market, and this is a market that is presently very, very busy. So basically, we expect the trend to continue on for the rest of the year, but we never know about 2023. But we’re optimistic because many projects have been postponed.”

The CEO also highlighted the build in inventory on the call, which management views as prudent given potential freight transportation delays with some of its Asian suppliers. He also noted higher freight costs saying, “We don’t see any improvement in the freight costs. I think we see that getting worse and worse and worse.”

Dividend policy

Management remains committed to returning capital to its shareholders, announcing a dividend increase in January of each year since 2010.

Given uncertainties arising from COVID-19, the company did not pay its shareholders a dividend for the first quarter of 2020. However, the dividend was reinstated the following quarter.

In Jan. 2022, the company announced an 86 per cent dividend hike, raising its quarterly dividend to 13 cents per share (from 7 cents per share), or over 52 cents per share on a yearly basis. This equates to a current annualized yield of approximately 1.3 per cent.

Analysts’ recommendations

According to Refinitiv, this industrials stock with a market capitalization of $2.2-billion has one buy recommendation (from National Bank’s Zachary Evershed) and two neutral calls.

The firms providing recommendations on the stock include: CIBC World Markets, National Bank Financial and TD Securities.

Revised recommendations

In April, the stock had mixed revisions.

  • CIBC’s Hamir Patel cut his target price to $47 from $55.
  • National Bank’s Zachary Evershed increased his target price to $54.50 from $53.50.
  • TD’s Meaghen Annett reduced her target price to $48 from $52.

Financial forecasts

The consensus EBITDA forecasts are $254-million in fiscal 2022, up from $234-million reported in fiscal 2021, but falling back to $235-million in fiscal 2023. The consensus earnings per share estimates are $2.62 in fiscal 2022, up from $2.51 reported in fiscal 2021, and retreating to $2.37 in fiscal 2023.

In recent months, the earnings estimates have increased, especially for fiscal 2022. For instance, three months ago, the Street was anticipating EBITDA to come in at $207-million in fiscal 2022 and $213-million in fiscal 2023. The consensus EPS estimates were $2.12 in fiscal 2022 and $2.21 in fiscal 2023.

Valuation

The stock is inexpensive relative to historical levels.

According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 9.9 times the fiscal 2023 consensus estimate, below the five-year historical average of 13.2 times and near trough levels. For instance, in March 2020, when COVID-19 was rapidly spreading and lockdowns were put in place, the stock traded down to an EV/EBITDA multiple of approximately 8.5 times.

On a price-to-earnings multiple basis, the stock is trading at 16.4 times the fiscal 2023 consensus estimate, below its five-year historical average of 21.3 times and approaching trough levels during this time period. When the S&P/TSX Composite Index collapsed in March 2020, Richelieu’s share price traded down to a forward P/E multiple of roughly 15 times.

The average one-year target price is $49.83, implying the share price has 29 per cent upside potential.

Insider transactions

Over the past two months, there has not been any trading activity in the public market reported by insiders.

Chart watch

Year-to-date, the share price is down 11 per cent.

The share price has plunged 24 per cent from its record closing high of $51.06 reached on Feb. 9. In recent days, the sell-off has been on very high volume. To illustrate, on Thurs. April 14 over 909,000 shares traded, well above the three-month historical daily average trading volume of approximately 273,000 shares.

The relative strength index is down to 17 with the stock in oversold territory. Generally, an RSI reading at or below 30 reflects an oversold condition.

The stock may soon find technical support but investors may need to patiently wait for a recovery with the share price first needing to stabilize. The share price may find initial support in the $38 to $40 range. Failing that, the next support level is around $35. On a recovery, the share price has major resistance around $45, near its 200-day moving average (at $44.40) and its 50-day moving average (at $46.88). After that, there is a ceiling of resistance between $50 and $51.

ESG Risk Rating

Service provider Sustainalytics has given Richelieu a risk rating of 24.9, or ‘medium risk’. A company with a score between 20 and 30 is given a medium risk score. This score is as of Aug. 6, 2021.

POSITIVE BREAKOUTSApril 14 close
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AGI-TAlamos Gold Inc11.38
ALA-TAltaGas Ltd30.54
ARX-TARC Resources Ltd17.9
AX-UN-TArtis Real Estate Investment Trust13.4
BTO-TB2Gold Corp6.24
BTE-TBaytex Energy Corp6.35
BCE-TBCE Inc73.41
BIR-TBirchcliff Energy Ltd9.98
CNQ-TCanadian Natural Resources Ltd83
CPX-TCapital Power Corp42.25
CGG-TChina Gold International Resources Corp.5.33
CCA-TCogeco Communications Inc110.79
CSW-A-TCorby Spirit and Wine Ltd19.24
CR-TCrew Energy Inc5.5
ELD-TEldorado Gold Corp15.38
EFX-TEnerflex Ltd9.46
EQX-TEquinox Gold Corp.11.22
FFH-TFairfax Financial Holdings Ltd698.32
FR-TFirst Majestic Silver Corp17.94
FVI-TFortuna Silver Mines Inc5.61
FNV-TFranco-Nevada Corp210.82
FEC-TFrontera Energy Corp. 15
IMG-TIAMGOLD Corp4.69
IPO-TInPlay Oil Corp.4.29
KNT-TK92 Mining Inc. 10.08
KRR-TKarora Resources Inc. 7.44
LUG-TLundin Gold Inc11.66
LUN-TLundin Mining Corp13.59
TPX-B-TMolson Coors Canada Inc. 70.29
NFG-XNew Found Gold Corp. 8.95
NGT-TNewmont Corp. 106.94
NG-TNovagold Resources Inc10.32
NTR-TNutrien Ltd. 141.34
OGC-TOceanaGold Corp3.3
OLA-TOrla Mining Ltd.6.5
PAAS-TPan American Silver Corp37.69
PPL-TPembina Pipeline Corp50.09
PEY-TPeyto Exploration & Development Corp14.29
PHX-TPHX Energy Services Corp6.97
PSK-TPrairieSky Royalty Ltd18.36
QSR-TRestaurant Brands International Inc76.22
RCI-B-TRogers Communications Inc74.7
SEA-TSeabridge Gold Inc27.12
SII-TSprott Inc67.32
STEP-TSTEP Energy Services Ltd. 3.48
SU-TSuncor Energy Inc42.57
SGY-TSurge Energy Inc10.07
TECK-B-TTeck Resources Ltd54.46
TPZ-TTopaz Energy Corp. 22.7
TIH-TToromont Industries Ltd121.39
TOT-TTotal Energy Services Inc8.9
TOU-TTourmaline Oil Corp63.96
TGL-TTransGlobe Energy Corp5.64
TCW-TTrican Well Service Ltd4.31
TFPM-TTriple Flag Precious Metals Corp.20.64
WED-XWestaim Corp. 2.44
WTE-TWestshore Terminals Investment Corp36.27
WPM-TWheaton Precious Metals Corp. 64.7
WCP-TWhitecap Resources Inc10.86
YRI-TYamana Gold Inc7.82
YGR-TYangarra Resources Ltd. 2.92
NEGATIVE BREAKOUTS
ALC-TAlgoma Central Corp16.75
BNS-TBank of Nova Scotia85.16
GBT-TBMTC Group Inc14.42
BRMI-TBoat Rocker Media Inc.4.21
CIX-TCI Financial Corp18.34
CPLF-TCopperleaf Technologies Inc.12.06
CL-CNCresco Labs Inc. 6.77
DSG-TDescartes Systems Group Inc77.3
DRT-TDIRTT Environmental Solutions1.57
DBM-TDoman Building Materials Group Ltd. 7.28
DND-TDye & Durham Ltd. 21.12
EFN-TElement Fleet Management Corp.11.5
EQB-TEquitable Group Inc61.32
GDI-TGDI Integrated Facility Services Inc. 48.58
GCG-A-TGuardian Capital Group Ltd35.8
HUT-THut 8 Mining Corp.5.6
IBG-TIBI Group Inc. 12.51
ITR-XIntegra Resources Corp.1.69
IVQ-U-TInvesque Inc.1.26
LNF-TLeon's Furniture Ltd. 20.76
LNR-TLinamar Corp49.94
MRE-TMartinrea International Inc7.83
MI-UN-TMinto Apartment REIT19.95
NCU-TNevada Copper Corp0.61
ONC-TOncolytics Biotech Inc1.9
ONEX-TOnex Corp80.64
SIS-TSavaria Corp. 16.02
SMT-TSierra Metals Inc1.31
ZZZ-TSleep Country Canada26.58
SYZ-TSylogist Ltd. 9
TFII-TTFI International Inc. 102.47
LEV-TThe Lion Electric Company9.06
TCL-A-TTranscontinental Inc16.99
VLNS-TValens Company Inc.1.54
VOYG-TVoyager Digital Ltd.5.28

Source: Bloomberg

Please note that this report is not an investment recommendation.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

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