With the school year under way, you might want to consider stocks in companies that are positioned to benefit from the growth in spending on our youth as they prepare for another year in the classroom.
The following are a few Canadian ideas to consider for the equity portion of portfolios.
Sears Canada Inc. is a retailer with a network of department stores, furniture and appliance stores, dealer stores, outlet stores, floor covering centres and catalogue merchandise pick-up locations. The company is engaged in a difficult, but much-needed, business transition that is changing the way it operates.
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The company’s management team, introduced in early 2001, is focused on cutting costs, remerchandising the stores and retraining customers on a new set of values.
What that means is that they are attempting to change the mentality of their customers, so they shop more regularly instead of waiting for sales.
The company’s second-quarter results provided evidence of a positive transition, with gross margins, expenses and inventory levels all showing improvements, despite a weak sales environment. The company’s balance sheet and cash flow is also improving over the past year.
At the time of writing, Sears Canada was trading at $18.53. Given that I am forecasting 2004 earnings of $1.64, the stock is trading at a price to earnings ratio of 11.3X 2004 earnings per share. This is a discount to its U.S. competitive peer group of 13X-14X forward EPS.
Dorel Industries Inc. is a global manufacturer of consumer products. It focuses on three key markets: juvenile products, ready-to-assemble furniture and general home furnishings.
The company’s juvenile segment makes and imports products, such as infant car seats, playpens, swings and strollers. The acquisition of France-based Ampa Group in February 2003 positions Dorel as the world leader in the sector. Given favourable demographics and ongoing government safety regulations should provide a strong growth outlook for the juvenile industry, even if North American consumer spending slows. The home furnishings division manufactures products such as home and office furniture metal folding furniture, and student-friendly futons.
Despite a weaker sales environment during the second quarter, the company’s operating margin for the division was little changed at about 14 percent.
The company is poised to benefit as a consolidator in this sector as many competitors are struggling to survive. Overall, the company shows signs of margin improvements from the second quarter and I project 10 percent sales growth for 2004.
The sound balance sheet gives the company financial flexibility to potentially make opportunistic acquisitions to help grow earnings.
Dorel Industries Inc. trades at a substantial discount to its long-term average price to earnings ratio of 14X.
Alimentation Couche-Tard Inc. is the largest Canadian convenience store owner and operator, and the seventh largest in North America. It owns stores that operate under names such as Mac’s, Becker’s, Mike’s Mart and Provi-Soir.
Couche-Tard is viewed as one of the operators in this sector to possess the winning formula of a solid balance sheet, access to capital and superior merchandising programs.
As such, the company has been able to take advantage of challenging industry conditions by acquiring well-located stores at liquidation prices and improving profitability through economies of scale.
More than a dozen acquisitions have provided Couche-Tard’s management with widespread experience in the fundamentals of integrating acquisitions.
As a result, the company has provided a strong track record of growth, resulting in compound annual growth rates of 46 percent in revenue and 31 percent in earnings since 1998.
Couche-Tard trades at a price to earnings ratio that is in line with its peer group convenience store competitors. However, given the company’s superior growth prospects it deserves a premium price to earnings ratio of 17-18X over its competition. Presently, the stock trades at a discount to this price to earnings ratio.
Finally, Mega Bloks Inc. is the second largest marketer and manufacturer of construction toys in the world, with a focus on interlocking plastic building blocks, and serves more than 100 countries.
Despite a seasonally low quarter, the company generated 18 percent revenue growth compared to 2002. Based on retailer commitments, management has indicated the company has more shelf space in all of its major accounts this holiday season than last.
Recently, the company signed a global licensing agreement to sell construction toys based on the Teenage Mutant Ninja Turtles, which is timely given that the TV show was recently relaunched. In 1987 it was the top children’s show and remained through the late 1980s and early 1990s.
The company trades at a slight discount price to earnings ratio to its competitive peer group of 17.4 X forward EPS, which makes the company that much more attractive when looking at forecasted 20 percent plus revenue and EPS growth in the second half of 2003 as we enter the peak toy-selling season.
Ian Morrison is an investment adviser with Wood Gundy Private Client Investments in Calgary and is licensed to sell insurance products. His views do not necessarily reflect those of CIBC World Markets Inc. or The Western Producer. Morrison can be reached at 800-332-1407 or by e-mail at ian.morrison@cibc.ca.
