2 consumer goods manufacturers to buy for the long term

Dorel Industries and Gildan Activewear are both attractively priced consumer goods manufacturing stocks to buy for long term share price gains. Each also pays a modest but stable dividend.

Since May, the shares of Dorel Industries Inc. (TSX—DII.B) have jumped by 21.4 per cent. This suggests that it’s no longer what’s known as a ‘value trap’ (seemingly a bargain stock but it never goes anywhere). This consumer goods manufacturing stock is expected to earn more this year and next. While its sustainable dividends are attractive, they’ve failed to rise since 2013. On balance, Dorel remains a buy for further long-term share price gains and attractive, but flat, dividends.

Dorel operates three businesses. The Juvenile segment manufactures children’s products, such as car seats, strollers and so on. The Sports segment provides bicycles and apparel under the brands Cannondale, Schwinn, GT, Mongoose, Caloi, Iron Horse and Sugoi. And the Home Furnishings segment sells a variety of furniture products made in Canada and abroad.

In the six months to June 30, Dorel earned an adjusted $34.2 million, or $1.05 a share (all numbers in U.S. dollars unless preceded by a C). This was up by nearly 21 per cent from adjusted earnings of $28.4 million, or 87 cents a share, a year earlier.

Adjusted earnings exclude one-time items such as impairment losses on intangible assets (such as goodwill), restructuring and other costs and re-measurement of forward purchase agreement liabilities. Dorel “believes that excluding these items provides a more meaningful comparison of its core business performance between the periods presented.”

Dorel’s cash flow is higher

Dorel’s higher adjusted earnings are confirmed by its higher cash flow. By our calculations, its first-half cash flow of $64 million exceeded cash flow of $58.6 million a year earlier. What’s more, the cash flow significantly exceeded total net investment of $10.3 million and dividend payments of $19.4 million. Excess cash flow should enable the company to service and gradually reduce its debt. We look for the net debt-to-cash-flow ratio to fall from 4.6 times today to within our preferred ratio of two times or less.

Excluding one-time items, the Juvenile and Home Furnishings segments performed well. This overcame poor performance in the Sports segment.

President and chief executive officer Martin Schwartz said, “Dorel Home Furnishings continued its consistent strong performance . . . with sustained, strong on-line sales growth.” In the first half, this segment’s operating profit jumped by nearly 66 per cent, to $30.2 million.

Mr. Schwartz said that Dorel Juvenile’s strong performance is largely due to “better than expected results in China and overall pricing reflecting current foreign exchange levels.” This segment’s first-half adjusted operating profit went up by 38 per cent, to $35.4 million.

Dorel Sports performed poorly. The North American bicycle market was weak and competitive. It writes, “continued industry-wide discounting due to excess inventories . . . impacted the segment’s profitability.” Dorel Sports’ adjusted operating profit plunged by more than 52 per cent, to $10.5 million. It’s taking steps to raise the segment’s profit.

Mr. Schwartz is upbeat about Dorel’s outlook. He said: “Overall, all three of our segments are poised to deliver double digit adjusted earnings growth in the second half versus last year. With the changes we have made, and will continue to make, we are optimistic about our results for the balance of the year.”

Indeed, in 2016, Dorel is expected to earn adjusted earnings of C$3.41 a share. This would represent earnings per share growth of 13.3 per cent from C$3.01 a share last year. Based on this year’s earnings estimate, the shares trade at an attractively low price-to-earnings, or P/E ratio of 10.8 per cent.

Dorel is a bargain stock for value investors

In 2017, Dorel’s earnings are expected to climb by 17.9 per cent, to C$4.02 a share. Based on this estimate, the shares trade at an even better P/E ratio of only 9.1 times. That seems cheap for a company with fast earnings per share growth.

Dorel is cheap by two other yardsticks of value. Its share price is nearly 16 per cent below its book value. And its price-to-cash-flow ratio of 4.6 times is below five times. This can indicate a buy. In Dorel’s case, it does.

Keep in mind, too, that the shares now have upwards momentum. They could continue to go up. Dorel remains a buy for further long-term share price gains as well as attractive, albeit flat, dividends.

Consumer goods manufacturing stock

Gildan Activewear’s (TSX—GIL) shares have slipped by 6.6 per cent since May, making its shares a little cheaper. This cyclical consumer goods stock is expected to earn more this year and next. Its dividend yields a modest 1.1 per cent. More important, the dividend may fail to rise in 2016.

Gildan manufactures and markets branded basic family apparel, including T-shirts, fleece, sport shirts, underwear, socks, hosiery and shape-wear. The company distributes its products in print-wear markets in the U.S., Canada, Europe, Asia-Pacific and Latin America. In retail markets, it sells its products mostly to retailers in the U.S. and Canada. Gildan also manufactures for select global athletic and lifestyle consumer brands.

Gildan is vertically integrated. That is, it owns and operates large-scale manufacturing facilities, mostly in Central America, the Caribbean, Bangladesh and North America. It writes: “The facilities are strategically located to efficiently service the quick replenishment needs of customers.”

Gildan expects to earn from US$1.50 to US$1.55 a share in 2016 (all numbers in U.S. dollars unless preceded by a C). That works out to C$2.02 or so a share. That’s up by a modest 4.7 per cent, from C$1.93 a share last year. Based on this earnings estimate, the shares trade at a price-to-earnings ratio of 18 times.

In 2017, Gildan’s earnings growth is expected to accelerate by 18.8 per cent, to about $2.40 a share. Based on this estimate, it trades at a reasonable price-to-earnings ratio of 15.1 times.

The consensus recommendation of 11 analysts is that Gildan is a buy. We agree. Buy it for long-term share price gains as well as modest, stable dividends.

 

The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846