DII-B.TO - Dorel Industries

[Viking]

Being Canadian, I am always on the lookout for local, world class companies. Dorel has three business segments: kids carseats & strollers, bikes and nice looking cheap furniture. Bikes, Europe and Brazil are hot. US kids stuff saw a blip in Q3 and cheap furniture is working through some freight cost issues (both are ST issues). Top and bottom line has been and will continue to grow nicely (about 10% per year). Small amount of debt and solid management. As the company executes and delivers I would expect the share price to respond. Shares actually traded at just over $33 back in 1999; I think back then Dorel was a stock darling trading at a crazy high multiple... How times change!

 

2010 RBC Est Net Earnings = $3.80

2011 RBC Est Net Earnings = $4.20

Share Price = $33.37

2010 PE = 8.8; 2011 PE = 7.9

Dividend = $0.60; Div Yield = 1.8%

 

Q3 Conference Call Minutes: www.dorel.com/press/2010/DII_CC_Q3_10_Nov5_Transcript.pdf

Q3 Investor Presentation: www.dorel.com/press/2010/Dorel_Q3_10_IR_web.pdf

 

"Dorel Industries Inc. (TSX:DII.B.to - News) is a world class juvenile products and bicycle company.  Established in 1962, Dorel creates style and excitement in equal measure to safety, quality and value. The Company's lifestyle leadership position is pronounced in both its Juvenile and Bicycle categories with an array of trend-setting products.  Dorel's powerfully branded products include Safety 1st, Quinny, Cosco, Maxi-Cosi and Bébé Confort in Juvenile, as well as Cannondale, Schwinn, GT, Mongoose, IronHorse and SUGOI in Recreational/Leisure.  Dorel's Home Furnishings segment markets a wide assortment of furniture products, both domestically produced and imported.   Dorel is a US$2 billion company with 4500 employees, facilities in nineteen countries, and sales worldwide."

[beerbaron]

Thanks Viking, I'll revisit Dorel. Did not find anything compelling last year but I did not dig a lot too.

 

BeerBaron

[beerbaron]

I have revisited Dorel, it's neither a bad nor a great company. One of my favorite metric to evaluate a company's capital allocation opportunities is to use Munger's "Does the company have a history of creating at least 1$ of market value for every 1$ retained"

 

Looking at the last 13 years history it looks like the company retained around 1B in cash but their current market value is around 1B$ too. 13 years ago it had a mkt value of 250M$ (PE of 10). Not bad but not great either, my guess is that it's fairly valued right now. I'd be buying around 25$ to get a 20-30% margin of safety.

 

Lots of goodwill and intangible too.

 

BeerBaron

[Baoxiaodao]

I have revisited Dorel, it's neither a bad nor a great company. One of my favorite metric to evaluate a company's capital allocation opportunities is to use Munger's "Does the company have a history of creating at least 1$ of market value for every 1$ retained"

 

Looking at the last 13 years history it looks like the company retained around 1B in cash but their current market value is around 1B$ too. 13 years ago it had a mkt value of 250M$ (PE of 10). Not bad but not great either, my guess is that it's fairly valued right now. I'd be buying around 25$ to get a 20-30% margin of safety.

 

Lots of goodwill and intangible too.

 

BeerBaron

 

BB, very good point. I enjoyed your comments.

[PlanMaestro]

Munger's "Does the company have a history of creating at least 1$ of market value for every 1$ retained"

 

That is a great quote, where did you find it.

[beerbaron]

Munger's "Does the company have a history of creating at least 1$ of market value for every 1$ retained"

 

That is a great quote, where did you find it.

 

It's a classic Buffett/Munger approach, they stated it many times. I remember seeing a Munger video where he is debating using ROE VS the $ Retained Earning method. Could not find it again but it would be great if semeone could post it.

 

Here is what a quick google search found.

 

In 1984, Warren Buffett made these comments:

 

‘Unrestricted earnings should be retained only where there is a reasonable prospect – backed preferably by historical evidence or, when appropriate by a thoughtful analysis of the future – that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors.’

 

http://everythingwarrenbuffett.blogspot.com/2008/04/buffett-secrets-retained-earnings.html

 

It's a somewhat comparable metric to ROE. Except it will not be modified by share buybacks or issuances.

 

By the way: That is the metric Buffett uses to justify not paying a dividend. And I agree.

 

BeerBaron

 

[Viking]

As I continue to read here are a few more comments:

1.) very thinly traded stock...

2.) family controlled AND family run

3.) not short term oriented... makes decisions based on medium to long term

4.) talk a lot about importance of innovation; spend over $30 million per year on this

5.) results can be quite volatile from Q to Q (divisions, currencies etc)

6.) global leader in car seats... business appears to be in a holding pattern

7.) bike business has been on fire this year... Q4 will help confirm if this is a trend or one time thing

8.) furniture business will continue to face headwinds in Q4 (due to freight issues)

9.) made a number of purchases the past couple of years; restructured under performing units; looks to have some nice upside should things continue to come together

10.) dividend will likely be increased (currently $0.60) to $0.72 or more

11.) modest share repurchases will likely continue (likely bought back about 2% of shares outstanding in 2010)

 

Company earned $0.61/share in 2000. Should earn about $3.80 in 2010 = 20% compound growth

Average earnings from 2000 to 2003 was $1.45/share = 12% compound growth

 

I think it is reasonable to expect 10% growth going forward. Should the bike division continue to outperform then 10% will be too low. Still looks pretty cheap to me. (and underfollowed).

 

[PlanMaestro]

By the way: That is the metric Buffett uses to justify not paying a dividend. And I agree.

 

Oh, I agree too. The thing is that have not seen a good quote of the retained earnings approach and was hoping that this one could make the cut. It goes directly from the Miller/Modigliani franchise valuation, one of my favorite formulas ever.

 

And if someone can find the video that BB mentions.... p, p, please?

[doc75]

 

Does anyone here follow Dorel?  It popped up on a screen I was running last night.  I've only looked at it briefly, but it has been trading down since the new year and in many regards it looks like it's getting pretty cheap. Maybe one for the watch list.

 

Good stuff:  PE in the 7s, reasonable ROE, excellent history of profitability, and in a very robust industry (primarily non-faddish products for kids and bicycles).  Dividend payout of around 2%. Share buyback announced in March for around 2.5% of float. The stock briefly took a big hit in the 2008-2009 implosion, but it looks like the business skated through almost unscathed. 

 

Badness:  Split share structure.  Trades below book, but significantly above tangible BV -- lots of goodwill/intangibles on the balance sheet.  Receivables increased dramatically in the recent quarter and debt has increased in tandem.  (This appears to be a temporary situation. Management addresses it in the quarterly report.)  The biggest issue, and undoubtedly the reason for the declining price, is that margins dropped from 25% to 23% in the recent quarter, so income was much lower in the last quarter (YOY)  despite higher revenues. 

 

A soft European/US retail environment has hurt the company recently. Management cites currency effects, input costs, and higher financing costs as the cause of decreased margins in the last quarter.  The higher financing costs were very significant, as they went from 3.3M to 5.9M, apparently as a result of converting a revolving credit line to long term debt at a fixed (and significantly higher) rate.

 

For what it's worth, Thomson/Reuters indicates that there has been net selling by institutions as of late, with 2 of them closing out their positions.

[RRJ]

Funny-I just started looking at this two days ago. I had flagged it as a potentially predictable company that I might be able to value with some degree of accuracy and saw it had dropped some.  I don't have insights beyond that at this point but I thought it was worth noting it had popped up on my radar too.

[PlanMaestro]

Actually their FCF multiple is more like 6 (depreciation and amortization > capex).

 

It looks very cheap, but I suppose you want more of an assessment of its safeness. As you mention, their TBV does not provide downside protection so you have to be comfortable that they can defend their cash flow. And from a distance, and that means Mexico, the first risk that jumped on me is that I do not like their product mix.

 

I am surprised they have been able to consistently grow revenues at a 10% despite this so I might be missing something in the following assessment. Take it as 20,000 feet view.

 

Furniture: reminds me of Dexter shoe. Many cheap American stocks in this sector. Part of this is its extreme cyclicality and high fixed costs. But also many of them are looking for ways to move to Asian manufacturing. and brand and distribution is not much of a barrier to entry in this sector. Transportation and distribution used to be a big barrier but ready to assemble and discounters are a big threat. I imagine there are some upscale niches like Natuzzi but the pictures of their products look more like affordable furniture.

 

Bicycles: I remember very well Cannondale, GT and Mongoose from the times I used to exercise (now I think it is bad for your health). But from what I remember, there is not much value in the frame and assembly, both of which are more of a commodity. Shimano used to be the Intel inside of this industry and I did not see anything in the 10K that makes me think different

 

Juvenile: it looks like their best segment. But as a Latin American father this is the first time I have heard of them. Are they well recognized in Canada?

 

 

[oddballstocks]

Just wanted to add about the kids brands, we have a few Safety 1st items, and I know Maxi Cosi is the luxury kids line, I would expect high margins out of them. Lowes sells Safety 1st as well as WalMart.

 

I believe the Cosco line is a private label brand, interestingly enough I've purchased Cosco items at Costco.

 

Just clicking on the links on the website I recognize almost all of the brands (as an American) I've seen most of them in stores and apparently own a few items that Dorel makes. 

 

In some ways they remind me of Audiovox, buying brands that used to be very popular and trying to give them a second life. 

[Stuart D]

Market cap is down ~60% this year. There were large impairment charges for weak sales in one of their divisions, revised earnings projections and some loss of accounts receivable due to Toys¨R¨US bankruptcy proceedings.

 

Having said that the market cap is currently ~$220m (USD) and FCF for F18 was ~$50m (USD). So there is potentially some value here...

 

2017 VIC debt writeup from "EITR210" is great:

 

https://valueinvestorsclub.com/idea/DOREL_INDUSTRIES_INC/0608338673#description

[Spekulatius]

Checked on their investor resource website what is going on. Key sentence from the Q2 2019 CC

Stephen MacLeod, BMO Capital Markets

Thank you. I just had one follow-up question. I was just curious, is there any way to quantify or estimate what percentage of your product is sourced in China and potentially can’t be shifted to other jurisdictions?

Jeffrey Schwartz, Chief Financial Officer

That’s ongoing and, no, we don’t—we’re constantly looking at options, so if I gave you, any number I gave you is going to be stale, because even though we might have a thesis that it can’t move doesn’t mean we’re not looking to move it or seeing if there’s another opportunity in different places. So no, I don’t really have that.

The way we look—there is definitely some stuff that we know, we highly doubt is probably a better word, we highly doubt we can move it, because we just, everywhere we go, the cost ends up being more than the item in China plus the tariff. But no, I don’t have a percentage.

 

So what’s next? Tariffs are going up even more going forward. Their gross margins are down significantly due to the tariffs on Chinese goods, but they don’t seem to be able to move this to a more cost location? So effectively they are saying that they are doomed? What about their competitors? Their cheap stuff seems to be getting hit disproportionately hard due to high % of cost of goods.

[Stuart D]

Hi @Spekulatius,

That's a good point around tariffs and gross margins. Gross margins from 2004 - 2017 were around 23%. I just checked their most recent 6 quarters, gross margins were:

2018 Q1: 23.1%

2018 Q2: 21.6%

2018 Q3: 20.7%

2018 Q4: 20.9%

 

2019 Q1: 20.8%

2019 Q2: 20.5%

 

A definite decline. They haven't quite fallen off a cliff just yet, but as you said there are more tariffs coming.

[Cigarbutt]

I had looked into Dorel a few years ago as a potential reasonably-priced growth stock opportunity. The stock now trades at a level last seen in 1997.

 

Reviewing this thread, it's interesting to bring forward into context what beerbaron had mentioned in 2011 about retained earnings and how the market eventually efficiently values the reinvesting capacity of management. Since Q4 2011 to Q2 2019, retained earnings have gone down by 630M (!) and market cap has gone down by 530M...

 

The company is based on three distinct businesses and has been run by a long-term group of related insiders who have reached a stage where a transition may be required.

 

The juvenile segment used to be promising but has not done well. The market, especially in the US, is very competitive. They are selling commodities and rely on Walmart for a very large part of their sales. The business strength has come down over the last few years in the context of secular changes (retailer pricing strength vs the manufacturer, e-commerce, lower values for 'brands' etc) that are unlikely to ease and tariffs have been hurting. I think this business has reached a relative new normal. Based on an EBIT of 30M and a multiple of 8, a 240M value is obtained for this sub.

 

The sports segment is similar to the juvenile segment. The Cannondale brand is different (and this part of the market has been growing) and may command higher pricing power but this brand competes with other larger and strong competitors (Trek, Giant, Specialized etc). The main part of their bike sales is low-end and goes through mass merchants. Somehow (kids prefer screens), bike use, in general, has been going down. This business has also reached a relative new normal. Based on an EBIT of 30M and a multiple of 8, a 240M value is obtained for this sub also.

 

The Home furniture segment may be underappreciated. This is a commodity segment also but this has been a long-term growing niche. A large part of their sales is in the ready-to-assemble market and online sales have increased significantly, from about 20% of sales of the segment in 2013 to more than 50% now. They have been able to develop leading market share in specific product categories. There is some cyclicality to this segment but they have built some kind of enduring moat. Given an EBIT of about 55M and a multiple of 10, a 550M value is obtained for this sub.

 

When adding up the parts, consideration could be given to the following items: a pension deficit of about 26M and "corporate assets" reported at 45M. The VIC write-up referred to above deducts capitalized corporate overhead of 200M from their total and I get a similar number given corporate expenses reported at 22M in 2018.

 

Leaving corporate assets aside and keeping present corporate governance and team intact, a value of about 8.50 per share is obtained which is pretty much where the shares are trading and pretty much corresponds to book value minus residual goodwill left on the balance sheet.

 

I think it is unlikely that the founding team sells now, given present valuation levels, but it's a possibility. This is interesting because a significant part of the capitalized corporate expense could be recuperated and a part of the corporate assets could be monetized. If half of both is realized, a share value of about 16$ is obtained.

 

This company started in 1962, selling manufactured cribs. The growth has been impressive but recent history suggests that the serial acquisitions overestimated the capacity to adapt but there is value left and others may think that they can do better. I guess this is worth following.

[Cigarbutt]

Since the last post, the second half of the dividend cut has been announced and, with trade jitters, the stock is down 44%.

 

The market cap is now 165.5M and enterprise value (assuming debt at par) is 165.5M + 513.4M = 678.9M. The cash held of 21.2M is not subtracted and is even lowish for their working capital needs.

 

It is interesting to remember that they had acquired Cannondale in 2008 for 195M (USD, which means about 265M in today's CDN).

 

When a dividend cut is announced in this context, one to assess the intrinsic and extrinsic reasons for the cut and to evaluate the potential financial resilience and the temporary nature of some of the underlying fundamental factors. Relevant because such announcements are often met with an exaggerated response. The extrinsic reasons are discussed daily in the media and are related to trade tensions and the evolving China dynamics as well as general economic conditions. The intrinsic reasons are related to paying a high price for acquisitions, suboptimal supply chain decisions and resulting relatively weak capital structure.

 

The recent announcement does not influence much the intrinsic value derived previously but indicates that a larger range needs to be considered, with some weight given to the fact that debtholders may become owners of the company. An aspect that is concerning is that, out of their three segments, the one (Home furniture) that is most profitable and cash flow generating is the least recession resistant.

 

This has the potential to become an interesting restructuring piece of action.