April 11, 2024

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Business is my step

Dorel Industries Will Be Among The First To Benefit From Continued Growth Of Cycling Market (OTCMKTS:DIIBF)

5 min read

Dorel Industries, Inc. (OTC:OTCPK:DIIBF) is a relatively unknown Canadian company that produces an interesting mix of products including home furniture, bicycles, and baby products such as strollers, car seats, and swings. The company is well-diversified as each category of products is separated into many different brands. For example, Dorel’s sports division owns brands such as Cannondale and GT. The company sells its products to basically every region in the world, including Latin America and Asia.

The company’s stock has increased 1000% since the March crash despite not having paid a dividend since late 2019, and this uptick was mainly fueled by the company’s success in the sports category. We hold a bullish view of the company; we believe that Dorel’s position in the bicycle market will continue to grow due to changes in consumer trends as a result of COVID-19. The company also has a strong enough balance sheet position to outpace competitors in terms of production and innovation, and its other revenue segments operate in markets where demand will continue to stay steady.

(Dorel Industries – Google Market Chart, 2020)

Biking grew increasingly popular during COVID-19, and this trend is here to stay

In “Dorel Sports, demand for bikes continued to spike, as families were looking for outdoor activities that are safe (Dorel Quarterly Report, 2020). Although the company credits short-term reasonings for the continued success of its bikes, we believe that this trend is here to stay for the long-term.

(Statista, 2020)

Firstly, the overall demand for all kinds of biking has gone up, whether it be mountain biking, off-trail cycling, or road biking. Consumers will have different preferences based on the availability of certain terrains within their neighborhood. Dorel Industries is extremely well-positioned to capture consumers in all areas because it has 9 different bicycle brands that each cater to a unique customer segment.

We believe that Cannondale, which is a higher-end road cycling brand, will see an uptick in sales especially during early spring of next year, as new consumers who picked up biking in urban environments during COVID-19 were deciding whether or not to lock in their long-term interest in cycling before buying a bike at a higher price point. Moreover, these consumers may have been using lower-end bikes during the summer of 2020 because higher-end bicycles were basically sold out everywhere during the pandemic.

All the other brands that Dorel owns should see growth as well, as consumers look to capitalize on a full summer of outdoor activities. Other brands include Schwinn, which produces electric bikes, and GT, which focuses on mountain and off-road biking.

We believe that biking, in general, will see an increase in the long-term because of the social aspect that has been introduced to the sport. Strava, which is a social media app that allows users to show off their exercising events, saw a “33% increase in uploaded activities over the last 12 months.” We believe that the euphoria that consumers get from Strava interactions such as sharing, liking, and commenting on posts, matches the feelings consumers get from traditional social media outlets such as Facebook and Instagram. Therefore, biking enthusiasts, whether old or new, have an extra incentive to participate in the sport.

Only 34.5% of the company’s sales came from the sports division, which suggests that the company has lots of room to grow.

Dorel Industries has the financial resources to outpace competitors by ramping up potential increased production in preparation for bicycle sales in 2021

The company’s financial situation greatly improved as “during the second and third quarter of 2020, unprecedented consumer demand for bikes and home products led to increased sales-generating higher cash on hand (Dorel Quarterly Report, 2020).”

The company has $1.1 billion in current assets compared to $880 million of current liabilities. Half of the company’s assets are related to the inventory account, and we believe that the company can offload these assets quickly if cash is needed to help pay for current liabilities. The company only has $306 million in long-term liabilities, and interest expenses do not have a material effect on operating cash flows. The company produced $49.3 million in operating income last quarter.

Therefore, we believe that the company can borrow additional cash at a favorable rate to ramp up production if necessary in preparation for another wave of demand for bicycles during 2021. It is essential to outpace competitors during this time because with many new customers in the sport of cycling, this is Dorel’s optimal time to build brand loyalty.

Earnings suggest that the company is reasonably valued

(Seeking Alpha Estimates, 2020)

The company has beat EPS estimates for the past 2 quarters due to the unprecedented demand for its products, and we are confident that the company can achieve both 2020 and 2021 estimates based on the near-certainty of the continued demand for bicycles. A forward P/E ratio of 20x is quite fair for a company that is extremely diversified and has lots of room to grow.

Speaking of the company’s diversification, we believe that the other 2 segments that the company operates in, which are baby products and home furniture, are mature markets with steady demand. Given that Dorel’s ‘Juvenile’ is “able to address all price points with its range of brands of products and the company “ranks in the top five of North American furniture manufacturers and marketers (Dorel Annual Report, 2020),” the company can use the cash earned from these segments to further invest in the growth of cycling products.

Investing in Dorel comes with certain risks

The bicycle supply market is highly competitive and Dorel competes with brands such as Trek, Specialized, Scott, Orbea and Fuji. Product quality is an essential part of consumer brand preferences, and the inability to satisfy consumers in terms of quality will lead to lower lifetime recurring revenue per customer. Moreover, our expected increase in overall spending on bicycles in 2021 may be offset by the general economic environment, as we may soon face a recession, which means consumers may not be prioritizing discretionary spending.

In summation, Dorel is well-diversified and has a strong market position in all three industries that it operates in. We are most excited about the long-term growth in the cycling sector, and believe that Dorel can be the first company to realize these gains by continuing to innovate and by building brand loyalty.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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