Cycling Gain: Bet on Bikes

03/12/2015 10:00 am EST

Focus: GLOBAL

Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

Cycling has been growing more popular for the last decade, as more people become aware of the fitness benefits it can bring. The global cycling market was estimated to be worth $50 billion in 2012, 63% higher than a decade earlier, observes Gavin Graham, contributing editor to Internet Wealth Builder.

The growth in the popularity of cycling has been particularly notable in more affluent households, which tend to graduate to higher-end products with higher margins, a trend that is notable in bikes, where top-end models can cost as much as $10,000.

To play this trend, I recommend Montreal-based Dorel Industries (TSX: DII.B). Established in 1962 as a manufacturer of infant car seats and furniture, Dorel expanded into home and office furniture (1990s) and bicycles (2000s) through a series of acquisitions.

With sales in more than 100 countries generating $2.4 billion in revenues in 2013, it employs 10,500 people in 25 countries.

Some $993 million (41%) of revenue is from the juvenile division, which boasts such well-known brands as Cosco, Quinny, Maxi-Cosi, Safety 1st, Bebe Confort, and Infanti.

In 2014 it acquired juvenile business of Lerado in Hong Kong for $120 million, making it one of the top three infant car seats suppliers in China, supported by three factories in China and an R&D facility in Taiwan.

Another $919 million (38%) comes from the recreation/leisure (cycling) division, with such brands as Cannondale, GT, Schwinn, Mongoose, Caloi, IronHorse, and Sugoi. In 2013, Dorel bought a 70% stake in Caloi, the largest bicycle business in Brazil.

CEO Martin Schwarz is positioning Dorel to become the largest bike-maker in the world with a focus on high-end, higher-margin bikes. With bike-industry sales growing globally, Dorel is well positioned for expanding sales and earnings.

Dorel experienced a sharp drop in earnings to $57.7 million (C$1.79 per share) last year from $108.5 million (C$3.39 per share) in 2013, owing to charges for the takeover of Caloi.

As a result, forecast p/e for 2014 is 12.5 times, and its price/book ratio is only 0.76. Dorel’s book value has risen steadily over the last five years to C$42.20 at the end of 2013 from C$33.64 at the end of 2009.

Overall, this stock is suitable for investors who are looking for a reasonably valued play on global markets, with a decent yield and a solid balance sheet.

Its cheap valuation makes it attractive for investors looking for a reasonable yield and some growth. The stock is a Buy for investors looking for exposure to attractive longer-term trends.

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