KeyStone’s Your Stock Our Take is Stelco Holdings Inc. (STLC:TSX) and our Dog of the Week is Dorel Industries Inc. (DII.B:TSX).

This week in our Your Stock Our Take Segment we answer a question on a company founded over 100 years ago. Headquartered in Hamilton and founded in 1910, Stelco Holdings Inc. (STLC:TSX) is a low cost, integrated and independent steelmaker with modern integrated steelmaking facilities in Canada and the U.S. The listener, who is down 60% on the stock asks us our take on the company and whether it meets KeyStone’s criteria for investment.

Our Dog of the Week is Dorel Industries Inc. (DII.B: TSX) a Canadian designer, manufacturer and seller of juvenile products, bicycles, and furniture. Dorel’s stock is down 11% over the past 5 trading days, 78% over the last 12 months and 90% over the last 3 years. Is there any hope near or long-term for the stock?

 

Spring 2020 Stock Investment Seminar Cities

Kelowna – March 31, 2020

Calgary – April 1, 2020

Edmonton – April 2, 2020

Vancouver – April 7, 2020

Langley – April 8, 2020

Victoria – April 9, 2020

Markham – April 14, 2020

Oakville – April 15, 2020

Montreal – April 16, 2020

Current market pullback and general nervousness – like we said last week – there a a couple things at play.

  • The market hates uncertainty – the Corona or Covid 19 virus is justifiably causing uncertainty.
  • The markets, particularly following the run to start 2020, were pricy. And priced for relatively perfection. Any, negative on the growth front, such as Covid 19, was bound to cause a correction.
  • The third is generally, from an investment perspective, the markets are likely been worried near-term – about a Bernie Sanders led Democratic party in the U.S. and the potential left leaning and potentially anti-business leaning policies that could be enacted if he was to win.

We would expect continued volatility.

The question is, and we have been getting this from many clients – what to do?

Should we “buy the dip” for example – – what we can tell you is that stocks have come off 10-15% on average over a very short term, at an unprecedented pace. We would, by no means say the market is generally cheap. When you see a 10-15% pullback from premium valuations, the general market is still not cheap, particularly given the uncertainty above.

Will there be buying opportunities – absolutely. It is not our opinion that Corona or Covid 19 completely derails the market long-term.

What our clients should be asking themselves is whether you are comfortable owned a business like The Boyd Group or Brookfield Infrastructure or Microsoft over the next 3-5 years. Again, we would say absolutely given the current information. We do not know if they will be higher 1-week, 1-month or even 1 year from now, but we see value in the businesses to beat the market long-term as they have in the past.

 

Your Stock, Our Take – Question

Stelco was recommended to me by a fund manager this time last year. It has dropped 60%. I asked you this time last year your take on the stock and you said it did not make KeyStone’s criteria and to avoid it. I trust your opinion even more now – your current thoughts on Stelco.  

  • Cynthia – via email.

Your Stock, Our Take

Stelco Holdings Inc. (STLC:TSX)

Current Price: $7.10

Market Cap: $ 629.86 million  

What does the company do?

Stelco Holdings Inc. produces and sells various steel products in Canada and the United States. It provides flat-rolled value-added steel, including coated, pre-painted, cold-rolled, and hot-rolled steel products, as well as metallurgical coke. The company sells its products to customers in the appliance, automotive, energy, construction, pipe, and tube industries, as well as to various steel service centers. Stelco Holdings Inc. was founded in 1910 and is headquartered in Hamilton, Canada.

Recent Financial Performance

Stelco Holdings Inc. fourth quarter and annual 2019 highlights include:

  • Revenue of $435 million for the quarter, compared to $464 million for Q3 2019, and $1.8 billion for the year compared to $2.5 billion for 2018
  • Net loss of $24 million for the quarter compared to nil for Q3 2019, and net income of $20 million for the year compared to $253 million for 2018
  • Adjusted EBITDA* of $10 million for the quarter compared to $23 million for Q3 2019, and $141 million for the year compared to $614 million for 2018
  • Shipments of 633,000 tons for the quarter compared to 654,000 tons for Q3 2019, and 2.4 million tons for the year compared to 2.6 million tons for 2018

Down considerably on all these quarterly metrics.

Conclusion

2019 Adjusted EBITDA in 2019 totaled $141 million, a decrease of $473 million, from $614 million in 2018, which reflects the decrease in revenue from lower market average price of steel, a decrease in shipping volumes realized, as well as lower non-steel sales.

We have been asked numerous times over the past 12-months from clients whether we thought Stelco was a BUY. From when it traded at $18, all the way to where it is today at $7.00. Each time, we have stated that it did not meet our criteria for investment.

In 2016 Stelco posted $1.3 billion in revenues which jumped to $2.46 billion by 2018, then fell to $1.84 billion in 2019. Revenue and profitability are very volatile and follow steel prices and demand. The business can be run very well – and Stelco appears to be reasonably well run with a strong balance sheet, but in challenging markets, such as the sharp drop in prices in Q4 and heading into 2020 – revenues drop and the company’s cash flow dries up.

On a sum of the parts valuation basis, perhaps Stelco offers value given its balance sheet and the fact the steel prices will eventually recover, but the lack of consistent cash flow growth in a business tied to a volatile commodity, make Stelco uninvest able based on KeyStone’s long-term investment criteria.

 

Weekly Dog

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 Dorel Industries Inc. (DII.B: TSX)

Current Price: $3.64

Market Cap: $118 Million

What does the company do?

Dorel Industries Inc. is a Canadian designer, manufacturer and seller of juvenile products, bicycles, and furniture. The company has operations across North America, East and South Asia, Europe, Oceania, Israel, and South America. The majority of the company’s revenues come from children’s accessories including infant car seats, strollers, high chairs and infant health and safety aids. Major brands include Safety 1st, Maxi-Cosi, and Tiny Love.

Key Points:

Dorel’s stock is down 11% over the past 5 trading days. However, the last week is the least of the company’s (or its shareholders) worries as the stock price has been steadily declining over just about any time horizon you look at; down 78% over the last 12 months and 90% over the last 3 years.

This is a company that I actually monitored very closely in our income research several years back. Back then the company was very profitable, had a strong position in the child safety product market and paid a decent dividend. I never recommended it because they had issues maintaining growth and hitting targets. After a while I just lost interest but I was quite surprised to see what has happened to the stock since then.

Recent Financial Performance:

  • The last quarter released was Q3 back in November. The Q4 and year end results are scheduled for March 12th.
  • Q3 revenue was up 2.3% to $686 million.
  • Adjusted earnings per share were down almost 80% to $0.07.
  • For the first 9 months of 2019, revenue was up 2.3% and adjusted EPS was down 50%.
  • Looking back over the last 5 years, we have really seen no growth in revenue and highly volatile operating earnings.
  • The company’s dividend was also cut in half at the start of 2019 and then suspended completely in October; not a great sign.

Conclusion

 We could dive deeper into the specific factors impacting Dorel’s financial performance. Likely this has a lot to do with competition putting pressure on margins. The company also mentioned tariffs being a factor. However, there isn’t really much point in looking further into the company when we see drops like this. The company’s problems have not been short-term issues. There has been much of any growth for the last 5 years, profitability has declined significantly over the last year and the dividend was cancelled. We don’t see any value in the company or reason to invest. Dorel is our Dog of the Week!