Pat McKeough responds to many requests from members of his Inner Circle for advice on specific stocks, as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. Beginning this week, we give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of our new approach offering you regular and specific buy, hold and sell advice in our daily posts. Every week you’ll get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “Our Top U.S. Stocks” on Thursday. This week an Inner Circle member asked us about one of the Canadian stocks that serves the U.S. housing market. Hardwoods Distribution purchases high-grade lumber and sheet goods from hardwood mills and sells them, largely for home construction. The company has added several U.S. acquisitions in the past two years. Pat looks at Hardwoods business and its balance sheet and assesses its prospects in light of the U.S. housing recovery. Q: Pat: What are your thoughts on Hardwoods Distribution? A: Hardwoods Distribution (symbol HWD on Toronto; www.hardwoods-inc.com), is one of North America’s largest distributors of high-grade hardwood lumber and specialty sheet goods. The company mainly purchases these products from hardwood lumber mills and sells them in the home construction, renovation and institutional markets. It operates through 33 distribution centres across Canada and the U.S. Hardwoods converted from an income trust to a conventional corporation in July 2011. In May 2013, Hardwoods bought certain assets of Olam Wood Products in Leland, North Carolina, for $2.8 million U.S. This business imports tropical lumber and decking material from Africa and South America and resells them to industrial customers and wholesale distributors in North America. In April 2014, the company acquired Hardwoods of Michigan, a producer, distributor and exporter of hardwood lumber, for $15.0 million U.S.
75% of Hardwoods revenue stems from U.S. market, largely in home construction
In the three months ended June 30, 2014, Hardwoods’ revenue rose 24.5%, to $119.0 million from $95.6 million a year earlier. Increased demand from the U.S. home construction market was the main reason for the gain. The Olam import business and Hardwoods of Michigan also contributed. Earnings fell 9.2%, to $4.0 million, or $0.24 a share, from $4.4 million, or $0.27. However, the latest quarter included one-time costs from the Hardwoods of Michigan and Olam businesses. Cash flow per share rose 9.4%, to $0.35 from $0.32. The company’s balance sheet is sound. Hardwoods pays a quarterly dividend of $0.045 a share, for a 1.8% yield. The company should be able to sustain its sales and earnings growth as long as demand from U.S. homebuilders remains steady or rises. Hardwoods gets about 75% of its revenue from the U.S., and 60% comes from the residential construction market. The pace of the U.S. housing recovery is uncertain, but the trend appears to be upward. We view Hardwoods Distribution as a hold for aggressive investors who want exposure to U.S. housing markets. A drug company that is a leader in treatments for Hepatitis C and HIV/AIDS was the subject of last week’s Question and Answers profile. You can see the article here.
