Two items relating to Dorel have come to my attention recently, and either might have been part of the reason for last week's big surge in share prices to close at $30.50, up about $3.50 on the week.
On Thursday I received my copy of the tri-yearly Key Stock Analyst publication from The Investment Reporter (one of the largest and, in my view, by far the best investment newsletter in Canada). The publication cited Dorel Industries as the BEST BUY in the Household Goods sector. However, Dorel is not among The Investment Reporter's so-called Key Stocks. (Incidentally, the organization's key stocks for the past few years have included Bombardier, Caldwell Partners, Cinram, Donohue, Geac Computer, Gennum, Loewen Group, MDS, Magna, Newalta, Precision Drilling, and Royal Bank; those who have followed their recommendations have greatly outperformed the overall market.) I think that Dorel could well join the service's elite Key Stock group in the not-distant future. That development would give a solid and sustained boost to the Dorel share price, and perhaps some investors are already beginning to anticipate that event.
In the Saturday Financial Post, columnist Sonita Horvitch reported that Toronto-based Sprott Securities' director of research, Marko Pencak, had included Dorel Industries among his top selections in the mid-cap area. To quote the column: "Based in Montreal, Dorel makes ready-to-assemble furniture, infant care products and home furnishings. Pencak said the company is having considerable success increasing sales and is in discussions with some major retailers, such as Toys 'R' Us, for the sale of a wider range of children's furniture. Sprott's earnings per share estimates are $1.81 for 1997 and $2.17 for 1998. Its 12-month target share price is $39.10." [That's 28 percent above last Friday's closing price. Also note that Dorel already has a strong distribution relationship with Walmart.]
For investors who might be concerned about the "Quebec factor" with respect to Dorel, there should be considerable comfort from the company's geographic distribution of sales. In 1996, 82 percent of sales were in the United States, 11 percent in other foreign countries, and only 7 percent in Canada. Increased uncertainty over Quebec that depressed the Canadian dollar, or even Quebec separation and eventual institution of a separate Quebec currency, would only serve to improve the international competitiveness of Quebec-based manufacturing concerns such as Dorel. Moreover, Dorel has substantial portion of its manufacturing facilities already based in the United States, such as the Charleswood operation in Missouri, the Infantino operation in California, and Cosco operations in several U.S. states (and operations in Britain and Holland).
Anyone who doubts that Dorel should be regarded primarily as a growth company rather than a cyclical consumer goods company (and evaluated with a correspondingly higher PE ratio) should review the company's record since 1990: 1) sales of $157 million in 1990, strong growth in every year (despite recession), rising to sales of $425 million in 1996 and a probable $500 million in 1997; earnings per share rising in most years over this period, from 15 cents in 1990 to $1.25 in 1996 (fully diluted), and a projected $1.80 (see Sprott forecast above) for 1997, with 89 cents per share already achieved for the first half or 1997. These figures work out to a compound annual growth rate for sales of 18 percent and for EPS (fully diluted) of 43 percent. In my view, these figures (and the solid and improving balance sheet of the company) warrant at least a market (TSE 300) multiple of 22.9 on current year's earnings, for a current value of $41.45 (using Sprott's earnings forecast). This figure is only about 6 percent above Sprott's target for the share price. |
