Richelieu Hardware: Great Company in a Tough Environment

Richelieu (Ticker: RCH in Toronto) is Canada's leading distributor, importer and manufacturer of specialty hardware and complementary products - and also ranks among the top players in its specialty in North America. After looking at this website, you are probably wondering why we should consider investing in a company that is obvously exposed to the housing market. Great companies can use difficult markets as a spring board to future growth. I think that Richelieu could be one of those great companies.

Richelieu just reported its fiscal year 2008 results that were solid in light of the economic conditions. During a difficult 2008, the company managed to pay down its debt (now debt free), bought back $20 million worth of its shares representing 5% of shares outstanding, paid over $7 million in dividend (payout ratio of about 20%) and made two acquisitions. Not bad for a company that sells to the "housing market".

During its latest quarter, Richelieu saw its Canadian sales (>80% of revenues) increase by 3.5% while sales in the United States decreased by 9.35%. While I fully expect that Canadian sales could prove more difficult in 2009, Richelieu seems to be able to offset declines by making solid acquisitions and gaining market share. So Richelieu ended up making $.046 for the quarter, which was more than last year and better than expectations.

The consensus earnings for both 2009 and 2010 is $1.52. Due to the difficult end market, expectations of growth have been removed from the market. With the stock trading at $17.95, we get a P/E multiple of about 12x and a dividend yield of 1.8%. Operations generated over $40 million in cash flow in 2008 while the company only paid out about $7 million in dividends. Even if 2009 were to be more difficult than 2008, the dividend appears safe.

With its debt free balance sheet, the company should continue to make acquisitions. Hopefully, some of their competitors will get into financial trouble during the downturn, enabling Richelieu to acquire them cheaply.

At this point, I feel that 2009 could be the low point of the cycle for Richelieu and the year could provide a solid entry point into the stock. Richelieu is definitely a company that I am watching very closely.

NOTE: This is not a recommendation. I may or may not own the stock mentioned. You should do your own due diligence since I am Evil.