Ever since the company rebuffed a takeover offer at $14.50 per share from Lowe’s Companies, Inc. (NYSE: LOW) back in 2012, shares of Canadian home improvement retailer Rona Inc. (TSX: RON) have struggled.
The company has been hit by declines in sales, which led to it closing some underperforming stores. It also cut costs, hired a new CEO, dealt with decreases in gross margins brought on by increased competition, and totally revamped a lot of its merchandising and pricing standards.
And for the most part, it looks to be working. Shares have rebounded since their post-failed merger lows of $10, rallying to current levels of $13.50. Last quarter’s results were great. The company beat analyst projections on both the top and bottom line, earning its largest quarterly profit over the last year’s results. It appears the company’s turnaround plan is right on track.
But that’s not the only reason investors should buy Rona. Here are three more.
1. Decent value
A commonly used metric to value retail companies is the price-to-sales ratio. And when it’s compared to its American peers, Rona looks to be a much better buy.
Lowe’s trades at a P/S ratio of just a little more than 1. The Home Depot Inc. trades at a much more generous 1.59 times sales. And Rona? A mere 0.38 times sales. That’s a huge gap between the three competitors, and at least to me, a big reason why investors should look at the Canadian home improvement retailer.
2. Taking care of shareholders
I always like to see a company make moves that are shareholder-friendly.
Rona pays a $0.14 per share annual dividend, good for a little more than a 1% yield. Even though the company doubled the dividend back in 2012, on its own it wouldn’t be very exciting.
But the company is also buying back its own shares at a pretty decent clip. The share count has been reduced nearly 10% since the end of 2010, slowing temporarily in 2013 as it restructured. If investors are getting a 2% share reduction and a 1% dividend each year, that’s not such a bad deal.
3. Leaner and meaner
Simply put, the company had too many locations, especially outside of its home base in Quebec. In 2013 it finally took the plunge and closed 11 locations in Ontario and B.C. It also laid off 325 support staff from locations across the country.
The market hates to see stuff like this, since it usually just confirms weakness. But long-term investors should be happy to see these types of moves. It shows management is willing to make hard decisions that are best for the future, not just the current quarter. And judging from recent results, this strategy seems to be working.
The elephant in the room
Unfortunately, it’s not all good for Rona. There’s one major cloud which could rain on the company’s parade: the Canadian housing market.
Rona bears are quick to point out that the company has shown weakness over the last couple of years while real estate markets were largely positive. What happens when the impending crash finally starts to rear its ugly head?
Business will slow down, that much is obvious. Building activity will grind to a halt, and folks just won’t fork out for expensive home renovations when the return isn’t there. No one is doubting the company’s ability to survive a real estate downturn, but it certainly won’t be a good time to hold the stock.
But real estate bears have been calling on the housing bubble to pop for years now, and it still hasn’t happened. As markets that aren’t Toronto, Vancouver, or Calgary begin to slow, real estate bulls are optimistic that the market can still achieve the ever elusive soft landing that won’t be catastrophic.
The bottom line? Rona is a play on the Canadian housing market. If you’re bullish on housing, it’s a good buy. And if you’re not, it will certainly suffer if house prices decline. It’s that simple. What side are you on?
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