Another very good quarter for Dorel, and thanks for alerting me to the report, Hassan. The market wasn't pleased by the report, though, if judged by the price action for Dorel on Friday. As usual, it's hard to explain the market's daily movements for the shares of one company, especially a relatively small fish like Dorel. It may be that people (those who follow Dorel) did not like something in the Q3 report, possibly the slowing growth of revenues, or it may be the Friday report that US home sales were down in September, running at their slowest rate since December 1997. Dorel's RTA sales would be somewhat affected by new home sales, although I would expect not drastically impacted (remember how they kept growing through the recession of the early 1990s).
Here's my assessment of the Q3 report, which is much more positive than the market's. First, to blow my own horn just a bit, in an earlier post on this forum (no. 63) I stated "I feel confident in predicting EPS for each of Q3 and Q4 both in the 50+ cents range." I certainly came very close for Q3: 51 cents basic and 49 cents fully diluted. And I think that they are pursuing an ongoing strategy that will expand earnings further for Q4 (I haven't checked for any seasonal pattern on Dorel's sales). Sales for Q3/99 increased only 8% over sales for Q3/98, which some investors may find disappointing. But note that sales for Q3/99 were up 10% from Q2/99. And earnings per share for Q3/99 were up 40% from Q3/98 before the big write-down for restructuring one year ago. Moreover, EPS for Q3/99 were up 18% from Q2/99. Anyone who is worried about slowing sales growth (particularly in the RTA sector) for Dorel should consider two things. First, profit growth remains very strong. Second, some of the major reasons for slowing sales growth are cited in the report. As president/CEO Martin Schwartz states, "Basically we cleaned house. This was part of the strategy developed when we purchased Ameriwood almost a year and a half ago. We knew that to make Ameriwood more profitable, certain changes had to be made. This included dropping non-furniture RTA lines, eliminating unprofitable accounts or small runs as well as severing relationships with certain high risk clients." These are all very smart and forward-looking moves by management. Dorel is not building market share at any cost but has a close eye on the bottom line, which is what most of us shareholders care about. So it looks like Dorel will be finishing 1999 with annual earning at roughly a $2.00 per share annual rate (actual EPS for the 1999 year being somewhat lower -- $1.90 would be my forecast for basic and about $1.85 fully diluted). Given Friday's closing prices of $26.50, this means that DII.B is trading at a PE multiple of less than 14, quite undervalued in my view based on its strong consistent growth record, superior management, and relative low volatility to business cycle for a consumer products company. If Dorel keeps growing at its rate of the past eight years for another year or two, it will enter the realm of bigger cap companies in Canada (current cap is around three-quarter billion dollars) and they will likely have sales above $1 billion for 2000. Then the company will start to get a much better following from analysts and will begin to join the institutional holdings. Then I would expect that Dorel will command a PE much more closely approaching the overall PE for the TSE 300 (which is now an amazing 29.66). With continuning profit growth and a substantial multiple expansion, I can see Dorel share prices doubling or better within two years, possibly more quickly (as usual, caveat emptor!).
Hassan, I am curious about how you reached your earlier decision to sell your Dorel shares, which was probably a sharp short-run decision (depending on exactly when you sold). I am holding my shares for the longer term (and have held them quite a few years now). The capital gains taxes that would be due on their sale (given that my cost basis is just a small fraction of the current price) in Canada keep me from trading the shares before I really want to say 'goodbye' for good. So far, Dorel shares look like one of Peter Lynch's "hold forever" shares -- until something fundamental goes wrong. Jay |
