Dorel gets a bounce from Phase One deal

Dorel’s shares have gotten a nice bounce from the Phase One US-China trade deal. But trade is not this consumer goods and manufacturing stock’s only problem.


Despite Dorel Industries’ low stock valuation, we remain cautious about its recovery until the US-China trade deal is resolved.

Though the US and China have agreed to a ‘Phase One’ trade deal that lowers some US tariffs on Chinese goods, it could be some time before Dorel Industries is provided with full relief. That’s because the US has kept in place the 25-per-cent tariffs it implemented last May as a bargaining chip for the second phase of trade negotiations. These tariffs also caused Dorel to suspend its dividend last October until, as the company’s president and chief executive officer put it, “the chaotic market conditions created by tariffs are normalized”.

Consumer goods and manufacturing stock Dorel Industries Inc. (TSX—DII.B) is a global organization, operating three distinct businesses in juvenile products, bicycles and home products. Juvenile products include global brands Maxi-Cosi, Quinny and Tiny Love. Dorel Sports brands include Cannondale, Schwinn, GT, Mongoose, Caloi and IronHorse. And Dorel Home, with its e-commerce platform, markets a wide assortment of domestically produced and imported furniture.

For the nine months ended Sept. 30, 2019, Dorel made an adjusted $14.5 million (all figures in US dollars unless otherwise noted), or $0.44 a share, compared with $29.2 million, or $0.89 a share, in the same period of 2018.

Revenues rise but profits fail to keep pace

Revenues rose 2.3 per cent to $2.0 billion, while adjusted organic revenue was up about 4.9 per cent. These increases were mainly driven by e-commerce in Dorel Home and Cannondale’s new line-up at the Cycling Sports Group.

The adjusted gross profit margin, however, declined to 20.4 per cent from 21.9 per cent. This decline is explained by decreases in gross profit in all segments. Dorel Home experienced increased warehouse costs as well as the impact of the imposed import tariffs. Dorel Sports was also negatively impacted by tariffs, while Dorel Juvenile was hampered by an unfavourable sales mix in Europe, where demand for mono-age use car seats has declined.

Adjusted operating profit declined 13.3 per cent to $61.9 million.

The Phase One trade deal has given Dorel’s shares a bit of a bounce. They’ve risen to $5.67 from about $5.00 before the deal. Nonetheless, the near-term outlook remains mixed. With the 25-per-cent tariffs still in place, we don’t think the company will reinstate its dividend anytime soon.

Meanwhile, Dorel Sports has positive momentum and is expected to deliver a solid fourth quarter. Dorel Home earnings should remain under pressure in the fourth quarter. But pressure from the tariffs appears to be easing as demand is growing again, suggesting an improvement in operating profit in early 2020. Civil unrest in Chile and an ongoing restructuring effort in Europe, however, pose challenges for Dorel Juvenile.

Dorel trades at just 8.6 times its forecast 2019 earnings of C$0.66 a share. Despite this low valuation, we remain cautious until the current trade and other uncertainties are satisfactorily resolved. Dorel is a hold.

This is an edited version of an article that was originally published for subscribers in the January 3, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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