Author Topic: DII-B.TO - Dorel Industries  (Read 8549 times)

PlanMaestro

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Re: DII-B.TO - Dorel Industries
« Reply #10 on: July 06, 2011, 07:40:59 AM »
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?

« Last Edit: July 06, 2011, 08:47:43 AM by PlanMaestro »


oddballstocks

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Re: DII-B.TO - Dorel Industries
« Reply #11 on: July 06, 2011, 08:42:27 AM »
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. 
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Stuart D

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Re: DII-B.TO - Dorel Industries
« Reply #12 on: September 21, 2019, 11:55:41 PM »
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
« Last Edit: September 21, 2019, 11:59:40 PM by Stuart D »

Spekulatius

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Re: DII-B.TO - Dorel Industries
« Reply #13 on: September 22, 2019, 10:12:51 AM »
Checked on their investor resource website what is going on. Key sentence from the Q2 2019 CC
Quote
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 canít be shifted to other jurisdictions?
Jeffrey Schwartz, Chief Financial Officer
Thatís ongoing and, no, we donítóweíre 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 canít move doesnít mean weíre not looking to move it or seeing if thereís another opportunity in different places. So no, I donít really have that.
The way we lookóthere 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 donít have a percentage.

So whatís next? Tariffs are going up even more going forward. Their gross margins are down significantly due to the tariffs on Chinese goods, but they donít 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.
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Stuart D

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Re: DII-B.TO - Dorel Industries
« Reply #14 on: September 22, 2019, 11:23:55 AM »
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

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Re: DII-B.TO - Dorel Industries
« Reply #15 on: September 26, 2019, 12:21:37 PM »
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.
« Last Edit: September 26, 2019, 12:26:16 PM by Cigarbutt »

Cigarbutt

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Re: DII-B.TO - Dorel Industries
« Reply #16 on: October 04, 2019, 05:04:36 AM »
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.