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My last posting was obviously a bit premature, as Dorel has taken its licks since then, catching up with the overall market decline of recent months. To see whether there was anything going on besides market shenanigans, I spoke with Dorel management and investor relations this week. Operations of the company continue to go well, and they are "comfortable" with street estimates for 1998 earnings of $2.40 to $2.50 per share (pre-split basis; this would be $1.20 to $1.25 per share on the currently trading shares) – with one proviso. They expect to book a one-time write-off in the third quarter, something in the range of $8 million I believe. Hence, the $1.20 to $1.25 that still looks likely is prior to the write-off. (By my rough count, there are about 27 million shares now outstanding, after the issuance earlier this year and the split. If this figure is right, then the write-off should be just under 30 cents per share.) Perhaps it is the prospect of this write-off that is bothering some investors, but there was certainly some forewarning of it in the Q2 report that announced the Leadra Design unit would be shut down and integrated into the more efficient RTA facilities; also that there would be rationalization between the overworked Charleswood facilities and the recently acquired Ameriwood unit. Both of these developments should significantly expand future production capacity and reduce operating costs, so these can only be viewed as positive long-run developments. Hopefully, investors will probe far enough to understand this as well and not further knock the share price when the write-off is officially pinned down in the Q3 report, expected around second week of November. Dorel remains a great stock for the long run and is now, in my view, significantly undervalued. The company continued to expand sales even during the recession of the early 1990s, and the current share price reflects not only anticipation of a recession in the U.S. (where Dorel sells the bulk of its output) but also the misconception that Dorel sales are very cyclically sensitive. Over the past 10 years, Dorel has grown sales by about 40% on a compounded annual basis, and it has also grown profits at a rapid pace. Now is the time to separate out the traders from the investors! |
