On today’s Breakouts report, there are 119 stocks on the positive breakouts list (stocks with positive price momentum), and just nine securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a home improvement stock that has seen its share price drop 8 per cent over the past four trading sessions while the S&P/TSX Composite Index has climbed higher - Richelieu Hardware Ltd. (RCH-T).
A main concern by investors is decelerating future growth once renovation activity normalizes (COVID-19 restrictions are lifted and people resume activities outside of their homes). For now, the stock remains in a downtrend and it may soon appear on the negative breakouts list. Further price weakness that takes the share price down towards the low $30 level may represent a potential buying opportunity for long-term investors.
This is a stock that has delivered long-term value to shareholders with the company reporting slow and steady sales and earnings growth over the years.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Quebec-based Richelieu Hardware 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 90,000 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.
In terms of geographical sales breakdown, during the first nine months of fiscal 2020, sales in Canada represented approximately 64 per cent of total sales with the balance, 36 per cent, coming from the United States.
The company has delivered slow but positive earnings growth over the years. Richelieu reported revenue of $1.042-billion in fiscal 2019, $1.0-billion in fiscal 2018, $942.5-million in fiscal 2017, $844.5-million in fiscal 2016, and $749.7-million in fiscal 2015. The company reported earnings per share of $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 (13.9 per cent in fiscal 2019).
There is seasonality in its business with its first quarter typically the weakest quarter.
Investment thesis highlights
- Strong and proven management team.
- Robust renovation activity boosting near-term sales and profitability.
- Reasonable valuation relative to historic levels.
- Prudent acquisition strategy. Richelieu has completed five acquisitions year-to-date, and four acquisitions in 2019.
Quarterly earnings results
On Oct. 8, the company reported its third-quarter financial results for the quarter ended Aug. 31, 2020 (Richelieu’s fiscal year end is at the end of November).
Sales were $311-million, up 15.6 per cent year-over-year, of which 6.9 per cent was from organic, or internal, growth, and 8.7 per cent was acquisition growth. EBITDA (earnings before interest, taxes, depreciation and amortization) was $49.1-million, up a remarkable 44.8 per cent year-over-year, and exceeding the consensus estimate of $40-million. The company’s EBITDA margin expanded to 15.8 per cent, up from 12.6 per cent realized during the same quarter last year. Earnings per share came in at 50 cents, up 59 per cent from 32 cents per share reported last year, and surpassing the consensus estimate of 40 cents.
That day, the share price rallied 6.5 per cent to a record closing high with over 614,000 shares traded. This is well above the three-month historical daily average trading volume of approximately 210,000.
On the earnings call, President and Chief Executive Officer Richard Lord provided a solid outlook for the start of the fourth-quarter, “We remain quite confident but still watchful. Looking back at September, we can see an upward trend in the manufacturers market and still very strong in the hardware retailers and renovation superstores market. But we understand this is due to exceptional circumstances.”
He added that in September, sales to manufacturers have increased around 5 per cent, and that sales to hardware retailers remained “very strong. Maybe not as strong as it was in the last quarter but still very strong.” Consequently, in the near-term, management anticipates the EBITDA margin to remain high and above normal levels.
He also noted on the call that the company may put through price increases, yet to be determined but potentially between 4 per cent and 7 per cent.
While a date has not been confirmed yet, the company is expected to release its fourth-quarter earnings results around Jan. 22. The street is anticipating revenue of $302.5-million, EBITDA of $39.7-million, and earnings per share of 39.5 cents.
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.
The company pays its shareholders a quarterly dividend of 6.67 cents per share, or over 26 cents per share on a yearly basis. This equates to a current annualized yield of approximately 0.8 per cent.
This industrials stock with a market capitalization of just under $2-billion is covered by three analysts.
Analysts’ recommendations are mixed. The stock has one “overweight” recommendation (from Anthony Campagna at ISS –EVA), one “neutral” recommendation (from Hamir Patel, at CIBC World Markets), and one “underperform” recommendation (from Zachary Evershed at National Bank Financial).
In October, after the company released its third-quarter earnings results, Mr. Patel at CIBC increased his target price to $40 from $37.
The consensus EBITDA forecasts are $147-million in fiscal 2020, up from $109.5-million reported in fiscal 2019, $152-million in fiscal 2022 and $163-million in fiscal 2022. The consensus earnings per share estimates are $1.43 in fiscal 2020, up from $1.18 reported in fiscal 2019, $1.51 in fiscal 2021 and $1.65 the following year.
In recent months, the consensus estimates have increased. For instance, four months ago, the Street was anticipating EBITDA to come in at $131.5-million in fiscal 2020 and $144.5-million in fiscal 2021. The consensus EPS estimates were $1.24 in fiscal 2020 and $1.42 in fiscal 2021.
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 13 times the fiscal 2021 consensus estimate, below the three year historic average of 14.2 times and well below its peak multiple of over 18 times. On a price-to-earnings multiple basis, the stock is trading at 23.2 times the fiscal 2021 consensus estimate, in-line with the three year historical average of 23.6 times.
The average one-year target price is $36.50 based on the target prices from two analysts. Mr. Patel has a target price of $40, implying there is nearly 15-per-cent upside potential. Taking an opposing view, Mr. Evershed has a target price of $33, suggesting the stock is fully valued.
Quarter-to-date, only one insider has reported trading activity in the public market.
On Oct. 16, chief financial officer Antoine Auclair exercised his options, receiving 30,000 shares at an average cost per share of approximately $13.90, and sold 30,000 shares at a price per share of $38.6095. Net proceeds exceeded $741,000, not including any associated transaction fees.
Year-to-date, the share price is up nearly 29 per cent. Since closing at a record high on Oct. 8, the share price has declined 12 per cent. Over the past four trading days, the share price has fallen over 8 per cent.
The relative strength index has declined to 35 with the stock nearing oversold territory. Generally, an RSI reading at or below 30 reflects an oversold condition.
Looking at key resistance and support levels, the share price has major resistance around $40, near its record closing high of $39.59 set on Oct. 8. Looking at the downside, the share price is currently trading around $35, a key support level. Failing that, the next technical support level is between $30 and $31.50, close to its 200-day moving average (at $30.94).
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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