Hardwoods Distribution is a buy for gains and dividends

Hardwoods Distribution (TSX—HWD) is doing better than it seems. We expect it to earn more this year and next. It remains a buy for long-term share price gains and dividends.

In the first half of 2014, Hardwoods earned $7 million, or 42 cents a share. This was down by 8.7 per cent from $7.6 million, or 46 cents a share, a year earlier. But the company did better than it seems.

In the first half, Hardwoods’ sales jumped by over a fifth, to $220 million. Sales in the U.S. rose by 14.7 per cent, or US$19.6 million. Organic growth added US$11.9 million while acquisitions raised the sales by US$7.7 million. Sales in Canada grew by 10.7 per cent, or C$5 million from the comparable year-earlier period. All of this was organic.

In the first half, Hardwoods’ costs rose by a faster 21.9 per cent, to $209 million. It cites higher costs to support its growth; the higher cost of U.S. expenses when translated into loonies; and extra costs from an acquisition this year and one last year.

Hardwoods’ pre-tax income of $11.3 million was down by 1.2 per cent from $11.5 million a year earlier. Its taxes rose by 12.4 per cent, to $4.4 million. The exchange rate turned U.S. profits into more loonies.

Hardwoods did better by some measures

Just remember that the cash flow fails to confirm the lower earnings. In the first half, its cash flow rose to $13 million from $12 million, a year earlier. Also, in the first half, its EBITDA improved to $12.6 million from $11.9 million. (EBITDA, or Earnings before Interest, Taxes, Depreciation and Amortization is a way of assessing a company’s underlying earnings).

Hardwoods’ cash flow exceeds dividend payments of $1.3 million and net capital spending of $0.7 million. But on April 28, it spent $15.3 million to buy Hardwoods of Michigan. The Canadian company borrowed money to pay for the acquisition. Even so, its net debt-to-cash-flow ratio is a safe 2.1 times.

Hardwoods of Michigan is “a fully-integrated producer and distributor of high-quality hardwood lumber from its sawmill and kiln drying operations.” Even better, it has a wide range of customers across North America as well as in Europe and Asia.

Hardwoods writes, “Had the acquisition occurred on January 1, 2014, management estimated that the Company’s consolidated sales would have been approximately $236.0 million and profit would have been approximately $8.2 million for the six months period ended June 30, 2014.” This suggests that the acquisition will add to Hardwoods’ earnings in the second half of this year and especially in 2015.

A favorable U.S. outlook

The outlook for the U.S. market is favorable. That’s a plus because Hardwoods generates 76.3 per cent of its sales south of the border. The National Association of Homebuilders expects U.S. housing starts to reach 1.038 million. That’s up by 12.3 per cent from last year. Similarly, the Home Improvement Research Institute expects Americans to spend 6.5 per cent more on renovations. And McGraw-Hill Construction expects non-residential construction to rise by 11.6 per cent.

Hardwoods expects “continued year-over-year sales growth.” It hopes to expand its market share in the U.S. The company expects to profit from the falling loonie and the implementation of its strategies. It plans to integrate Hardwoods of Michigan.  The only negative development was lower prices for some types of hardwoods.

One of Hardwoods’ strategies aims to raise sales of its proprietary imports. This lets it offer global products to its customers. A second strategy is to grow in commercial markets. It aims to become a first-tier supplier and to profit “on its import capabilities to offer off-shore solutions to the commercial sector to supplement domestic” products.

We expect Hardwoods Distribution to earn 85 cents a share this year, up from 79 cents a share last year. It remains a buy for long-term share price gains and dividends.



The Investment Reporter, MPL Communications Inc.
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