There has been a significant boom in home improvement and residential construction projects over the course of the pandemic.
The housing market is surging, and with new housing starts hitting an all-time high in March, Canadian stocks connected to businesses providing supplies for the construction of said homes stand to benefit significantly.
One of those companies is Richelieu Hardware (TSE:RCH). The company managed to grow both the top and bottom line last year despite significant shutdowns, and earnings per share are expected to continue momentum into 2021.
The question many Canadian investors are asking right now is if this stock has ran up a little too much, too soon.
Strong momentum in Richelieu Hardware's (TSE:RCH) target market is fueling strong growth
Richelieu Hardware has a diverse product line, with the bulk of it serving the residential real estate market. Things like cabinet handles, pre-built furniture, hinges, sliding doors, sinks, window frames, draw sliders.
I could go on forever with the amount of products they supply, but the key thing to understand is when new housing starts and renovations are firing on all cylinders, so should Richelieu.
And although there seems to be no end in sight for new housing starts, we could see home renovations and construction projects slow down as the economy opens back up and people start to venture outside of their homes. But, I'd definitely view this as the smaller portion of the company's target market.
There's tailwinds in place for the company to continue providing strong top and bottom line growth. Analysts expect the company to grow earnings by 15% in 2021 and revenue by around 13%. Whenever you can get a company growing the top and bottom line at a mid double digit pace, it's worth a second look.
However, we do have to understand that no matter how fast a company is growing, we have to figure out what we're paying for that growth, and whether or not it's justified.
Richelieu Hardware is trading at a steep premium to historical averages
If we take away some exceptional growth during the COVID-19 pandemic on the bottom line, Richelieu has been a company that has struggled to grow earnings over the last half decade. In fact, net income practically stalled out from 2017-2019. In fact, due to the pandemic the company had to cut the dividend.
Yet, despite the rocky history investors are willing to pay much more right now for the company than they ever have.
At 26 times earnings, 2.06 times sales, and 4.2 times book value, Richealeu is trading at a premium to its 3, 5, and 10 year historical averages in every one of these metrics. And if we look to forward earnings, the company is trading at 23.23 times forward earnings.
23 times forward earnings is a pretty expensive price to pay for a company only expected to put up 15% earnings growth. If Richelieu had historically grown the bottom line by mid double digits over the last half decade or more, 23 times earnings isn't a bad price to pay.
However to pay this price for a company that needed a global pandemic and wide-spread lockdowns to kickstart earnings and revenue growth again, seems to be a big ask.
Tailwinds aside, there might be better opportunities on the market right now
Double digit top and bottom line growth from Richelieu isn't anything to scoff at. It's an excellent growth rate and it's likely to have a strong Fiscal 2021 and maybe even 2022. However, it looks as if most of this momentum is already well priced in to the stock.
The pandemic helped the company in a big way. The inevitable resurgence in the economy and the fact that home renovations were extremely popular during peak lockdown periods drove some solid numbers.
However, what happens when the pandemic subsides, and people start spending their money on vacations, dining out, and other activities instead of renovating their homes? Also, what happens if new housing starts slow, and there is less demand for Richelieu's products?
Considering the company is just coming off of a dividend cut, I just don't have a ton of faith that they'll be able to navigate post-pandemic, at least enough to make its current valuation worthwhile.
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