|
|
 |
|
Dorel in neutral despite pedal powerGMI
By HARIS ANWAR Thursday, March 17, 2005 Dorel Industries Inc. is finding it hard to impress investors these days. The Montreal-based consumer products maker has put together a strong growth story in the tough manufacturing sector and racked up record results, only to watch its share price slide as some analysts cut their price targets on the stock. The stock closed at $41.30 yesterday on the Toronto Stock Exchange, down more than 7 per cent since March 8, the day before the maker of the Schwinn Sting-Ray bicycle and Safety 1st infant car seats announced its results, showing a 70-per-cent jump in its fourth-quarter profit to $34.7-million (U.S.), helped by strong bicycle sales. Profit for the quarter ended Dec. 30, 2004, rose to $1.05 a share compared with $20.5-million or 63 cents a year ago. The stock has fallen about 6 per cent over the last 12 months, clouding Dorel's impressive growth story. Some analysts attribute this pallid performance to the company's declining revenues from its furniture division, high raw material prices and rising debt levels. "We feel it will take a quarter of good operating performance on the part of Dorel before investors regain confidence in the story," said Jessy Hayem, analyst at Desjardins Securities. Ms. Hayem still recommends "buy" for the stock with a target price of $45.50 (Canadian), down from her earlier $48. A list of analysts compiled by Bloomberg shows seven "buys" and three "holds" on the stock. Dorel, which has a market capitalization of about $1.35-billion, has been a star performer in the consumer durable sector, yielding 22-per-cent compound annual sales growth in the last 10 years and 29-per-cent growth in share profit over the same period. It has mainly thrived on acquisitions and outsourcing much of its manufacturing to China. Schwinn is one of several brands that came with the last-year's $310-million (U.S.) acquisition of Pacific Cycle LLC. It owns many well-known brands in the juvenile furniture, car seat and stroller segment such as Cosco and Safety 1st. The company's third business segment is ready-to-assemble furniture for home and office, as well as metal furniture, step stools and ladders. Sara O'Brien, an analyst at RBC Dominion Securities Inc., says Dorel is still a "growth" story, but she only expects a slight improvement in margins in 2005. She lowered her 12-month price target for the stock to $42 (Canadian) a share from $45 a share. She has lowered her rating on the stock to "sector perform" from "outperform." "This multiple is at a discount to comparables to reflect the risk associated with Dorel's highly leveraged balance sheet, the company's integration focus in 2005, and margin pressures affecting all of the company's division," she wrote in a recent research report. The company didn't provide earnings guidance for 2005, but said sales growth should range between 5 per cent and 10 per cent. "This year, we're cautiously optimistic, but we've a lot of new products, and we'll continue to push in that direction," Jeffrey Schwartz, chief financial officer at Dorel, said in an interview. Mr. Schwartz says the company has redefined its business model to counter the competition from low-priced Chinese products. Now Dorel's North American unit is focusing on development of their new products, while manufacturing is being shifted to China. For instance, Dorel last year introduced plastic cars for kids to drive, which were one of the top selling items at retailer Toys "R" Us Inc. This year, Dorel plans to introduce motor scooters under its Schwinn brand. "We're going to be in that category by having these . . . made in China. So we're getting into a new category that we never would have gone into if it wasn't for China," Mr. Schwartz said. He also said that Dorel's rising debt level, which was 45 per cent of the total capital by the end 2004, shouldn't worry investors. "Our philosophy is that we should be okay as long as our business produces good cash-flows," he said. The company plans to pay down its debt with $100-million (U.S.) in cash flow it's expected to generate in 2005. But Mr. Schwartz indicated that Dorel is still looking for acquisitions, which might be a manufacturing line in China. Jason Hornett, an equity analyst at Calgary-based Bissett Investment Management, said that the recent fall in the stock is a buying opportunity because of its cheap valuations. "I think Dorel's valuation is excellent. It's trading at around a multiple of 10 of its fiscal 2005 earning estimates. Going down the road, it's expected to drive a lot of growth from acquisitions and new product launches," said Mr. Hornett, whose fund owns four million Dorel shares. Chinese factories key to growth Dorel last year introduced toy plastic cars for kids to drive, which were one of the top selling items at retailer Toys "R" Us Inc. This year, the Montreal-based manufacturer of consumer products plans to introduce motor scooters under its Schwinn brand. It is moving much of its manufacturing to China. Company information Financials SOURCES: THOMSON DATASTREAM; BLOOMBERG FINANCIAL SERVICES
|