Costco subscription renewals are skyrocketing. (Photo: Getty Images)
What to do with Richelieu Hardware, Saputo and Costco titles? Here are some recommendations from analysts likely to move prices soon. Note: the author may have a totally different opinion from the one expressed.
Richelieu Hardware (RCH, $34.36): an optimistic analyst
Even if its growth were to slow due to a recession in 2023, Richelieu Hardware will still manage to do well thanks to the good management of its finances, estimates Hamir Patel of CIBC Capital Markets.
He recalls that the company generates nearly 70% of its income through the residential sector: a quarter comes from new construction, while the rest is drawn from renovations and repairs to existing homes.
Housing starts should certainly slow down in 2023 because of the rise in costs which is holding back new buyers from entering the real estate market. However, the analyst points out, demand should pick up again on both sides of the Canada-US border in the medium and long term, in order to meet the deferred demand at a time when mortgage payments and construction material bills will be less salty.
Hamir Patel, however, notes that demand is stronger than expected, for which he is revising up his expected earnings before interest, taxes and amortization in the second quarter of the financial year to $ 69 million. Its annual forecasts for it are also 5% higher than the consensus.
According to him, two factors explain why the renovation and repair sector should do well despite the slowing economy. First, the North American housing stock is aging, with the median age of American homes being nearly 42 years old. Then, Americans are likely to stay longer than they expected in the residence they currently occupy, “being a prisoner of their low rates”, illustrates the analyst.
He recalls that in the past, Richelieu Hardware has always managed to increase these market shares in times of recession, while comparable Canadian spending on renovations tends to climb by 8% annually during these same periods.
The analyst acknowledges that the company has fared worse than its peers since peaking at $51 per share on Feb. 9, 2022: its price has tumbled 32%, so the S&P Homebuilders Index ETFs slid 20%, and the TSX Composite Index lost 6%.
Knowing that the company’s stock has always traded for 11x its EBITDA for the next 12 to 24 months, its current valuation at 8.5X its EBITDA for the financial year 2023 suggests that a recovery would make it gain 35% .
“We do not believe multiple erosion is warranted given that there is no deterioration in the company’s M&A prospects as it continues to gain market share in the United States and whose order book has improved over the past few years,” he wrote.
This is why he is adjusting his recommendation, changing it from “neutral” to “sector outperformance”. It maintains its target price at $47.