Dorel (DIIB) manufactures and distributes products in three segments: juvenile (strollers, car-seats etc.), leisure (mainly bicycles), and home furniture. The company’s fourth quarter results held up very well despite the downturn, suggesting many of the company’s products are recession proof. But the stock price has taken a hit, even though earnings are relatively stable. As a result, the P/E for this stable, profitable company is around 5!
Martin Schwartz has been CEO since 1993, and is also Chairman of the Board. Due to Dorel’s dual-class share structure, the Schwartz family controls 70% of voting shares despite owning only 10% of the company’s share capital. In Security Analysis, Ben Graham has warned us to be wary of instances where ownership control and risk are not aligned!
Furthermore, the company has mostly retained its earnings for the purpose of acquisitions. This company has instituted a dividend only last year, as historically they have used retained earnings to finance acquisitions. This continued in 2008 with a $200 million purchase of a US bicycle manufacturer.
An additional risk the company poses is that 30+% of its sales are to one customer (likely, Walmart) with another 10% to either K-Mart or Toys ‘R Us. Since there are no term contracts with these customers, a change of heart on their end would have a material adverse impact on Dorel.
Despite these risks, there appear to be value investors interested as late as last year, with Tattersoll and Franklin Templeton owning 10% each. As part of a diversified portfolio, DIIB appears to offer investors the opportunity to buy a stable, profitable company at a terrific price.
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Disclosure: Author owns a long position in DIIB.