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Dorel: Ride This COVID Beneficiary With FCF Yield Of Over 30% And 100% Upside

Mar. 08, 2021 8:15 AM ETDorel Industries Inc. (DIIBF), DII.B:CA18 Comments
Two Lions profile picture
Two Lions


  • Dorel was subject to a failed take-private by management. Shareholders thought the bid was inadequate and rejected it. As a result, risk arbs are forced to sell, pressuring the stock.
  • Dorel is trading below the proposed take-private price, equating to a FCF yield of over 30%.
  • At the same time, fundamentals for the business are extremely strong, benefitting from unprecedented demand for bikes and home furniture due to the Covid effect.
  • Today, public investors can buy Dorel well below where management insiders and private equity were prepared to bid for the whole company, benefitting from tailwinds and FCF generation.

Ride This COVID Beneficiary With FCF Yield of Over 30% and 100% Upside

After a failed take-private attempt by Cerberus and management, which offered shareholders zero premium, shares of Dorel (OTCPK:DIIBF) trade below their pre- take-private price. Minority shareholders were dissatisfied with the bid, despite a bump versus original terms, and opted to keep the company public to benefit from a positive inflection in fundamentals. During the take-private period attempt, equity indices were +20% and Dorel reported Q3 2020 blowout earnings due to unprecedented demand for its products. Dorel is a rare stock that has benefited from Covid-19, that is not trading at nosebleed valuations.

The first three quarters of 2020 (not even full year) generated Free Cash Flow of $4.14 per share, equating to a FCF yield of over 30%. My conservative valuation estimates indicate 100%-200% upside from current levels. The reason for the extremely discounted trading price today is due to technical selling with the exit of risk arbitrageurs who were betting on a deal close.

Business Summary

Dorel Industries (“Dorel”) is a consumer product company operating in three verticals:

  • Premium bicycles (Dorel Sports brands include Cannondale, Schwinn and GT);
  • Juvenile products (Dorel Juvenile brands include Maxi-Cosi, Quinny and Tiny Love); and
  • Home furniture (Dorel Home brands include Cosco, Signature Sleep and Ollie & Hutch).

Source: Dorel Q3 2020 Earnings Presentation

Revenues are roughly split evenly between the three segments and operating profitability split depends on the year in question. As one would expect, Dorel’s business has significant operating leverage (on top of financial leverage). The cyclicality of the business has created numerous cycles with Covid-19 acting as the catalyst for the next boom cycle for the business (more on this below).

Brief History

Dorel went public in 1987 with a dual-class share structure after a merger

This article was written by

Two Lions profile picture
Over a decade of experience in the investment management industry. Seeking investment opportunities featuring valuation discrepancies combined with a catalyst.

Analyst’s Disclosure: I am/we are long DIIBF. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (18)

Preserve & Prosper profile picture
Dorel floundered from 1998-2017 under Schwartz management. Now it is riding a temporary Covid bicycle frenzy. After bicycle market frenzy subsides in 2021, Dorel goes back to sleep. Not sure how much it is really worth, but certainly not $56. Cerberus is a very smart group, they would have paid up if they thought Dorel was worth more than their bid.
@preserve & Prosper Wrong on Cerberus. They are the vultures that come after the corpse. They buy distressed, out of favor assets and would NOT pay up or overpay for anything.
Preserve & Prosper profile picture
@Senna2002 Good point. You are right Cerberus is a company focusing on distressed assets.
I do not think Dorel is an attractive stock here. The Schwartz family has mismanaged it horribly for decades -- just look at the sales and profit records going back years. It is a grab bag of mediocre assets with no upside facing it. Bargains are bargains for a reason and this one is likely to stay on the financial junk heap until the Schwartz family sells Dorel, and they show no interest in doing that. Their deal with Cerberus was an effort to take it private.
@Preserve & Prosper I don't think it;s fair to say it was 'mismanaged' for decades. Stock price was fairly steady between $30-$45 paying a dividend that doubled over time. Revenues are flat from 2017 when the price was above $40.

They are in highly competitive businesses where growth has stagnated. Currently it's all about valuation, current $12/share is a joke even by Cerberus cheap standards which was willing to pay $16/share.

All 3 businesses are improving and being held back buy supply constraints. The cycling trend is not just Covid but the future of transport for many people. Furniture is booming, out of stock on many items. Kids division also turning around. You won't find many companies with over $3 billion in sales but a market cap of only $400 million all the while with improving fundamentals. Current market price is absurdly cheap. This is how you win in the stock market, you buy value and wait for the value to surface.
Xxfactor profile picture
What happens if another private buyer ends up getting the company? Do they pay shareholders an agreed upon price? I don't think the bike market is going to stay as strong during the re opening but IDK. You seem pretty convinced this is a great buy? I didn't know there was a shortage but the same thing happened with free weights.
@Xxfactor The shortage has been all over mainstream media for well over a year now. The market is still no where near supplied as the unprecdednted demand has created bike parts shortages. This will continue for a few years, at the very least. Furthermore Dorel is seeing a boom in electric bikes which shows no signs of slowing.
@Senna2002 we live in a supply and demand market. Nobody can meet the demand so the price will be driven higher. Bikes are still sold out everywhere. I can’t get my hands on a 2021 cannondale trail 8. I am going to go out on a limb and say Q1 2021 will be their best quarter ever!
@Two Lions
Congratulations on finding this real gem. The value is simply overwhelming, with FCF yield over 30%, as you note, and price to sales of 0.13 and price to book of 0.70 (according to Yahoo numbers). If I am way off on the latter, please correct me.

It is most unusual to find such a bargain in today's overstretched market where grotesque valuations are being based on price/sales figures in the teens and accompanied by losses.

Needless to say, I went ahead and made a substantial purchase and very much hope you will keep us appraised of developments with Dorel.
Xxfactor profile picture
@bargains What do you think about valuations being high because there are more and more people putting money into the market everyday? All these free trading apps and new interest from pop culture?
Yes, the overall market valuations are grotesquely high and I would not touch 98% of stocks right now. But, every once in a while, something comes along that makes a lot of sense. From my perspective Dorel makes sense and, incidentally, is involved in one segment of the economy and stock market (furniture) that happens to be very strong right now.
I am already all in on the company and wish I could buying more. I can't believe the price this trading at. I feel like I am missing something. The next 3 quarters are going to be exceptional. Q4 was actually really good but they had previously took deprecation of goodwill based on decrease market capitalization back end of 2019 early 2020. I believe this was done to decrease the book value of the company in order to justify the privatization. This is impossible to prove but just my suspicion. Then when the company never saw the dip they were anticipating they had to retroactively change that loss. Unfortunately all the shareholders see is the expense not the increase in assets on the balance sheet because they were temporarily artificially low to justify the lower price of the privatization deal.

It was important to listen to the board's sentiment during this last earnings call to determine their objectives. I was paying attention to determine if they became more optimistic about the future. They did! This tells me that they have given up on taking the company private and will likely reinstate dividends because this has hurt them move than anyone. No more doom and gloom. Paying this tax bill was done in Q4 to further convince shareholders to sell but sentiment the board had, tells me they have changed their minds.

Hold onto your hats boys, we are about to make some real money. I am going to go out on a limb and give an EPS estimate of .85 per share. Crazy high for Q1 but we will see.
Yeah the price here is ridiculous. I did expect the arbs to come off but wasn't expecting a slide after the tough Q4. Moving forward we are being held by by component shortages for bicycles and a shortage of shipping containers.
any thoughts on the 4th quarther?
Dave Schneider profile picture
BMO reinstated coverage with a market perform, so sumtin' ain't right
@Dave Schneider Nah. TD and BMO are dispassionate about this name. Plus they were the two brokerages that did the $13 - $17 'fairness' evaluation on behalf of Dorel's management.
@philweird Yes exactly. And got paid very handsomely I would imagine. They will upgrade the company, they may wait another quarter as to not make it look obvious.
Xxfactor profile picture
@Dave Schneider Not disagreeing with you but these analysts are all over the place.
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