BUY ALERT: This TSX Stock Could Rally After its Earnings Event on Thursday

Richelieu Hardware (TSX:RCH) will release its second-quarter results on July 9. Here are the reasons why you should buy its stock before the earnings event.

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Since the start of 2020, the stock market has been through a roller-coaster ride. Fears about the second wave of the COVID-19 continue to take a toll on investors’ sentiments. Also, expectations of the pandemic’s huge negative impact on second-quarter corporate earnings have further increased the market volatility lately.

Nonetheless, not all stocks are trading on a mixed note right now. Richelieu Hardware (TSX:RCH) is set to release its second-quarter earnings on Thursday, and its stock has reached its highest level since February. Let’s explore what to expect from Q2 results and find out whether it’s a good time to buy its stock.

Estimates for Richelieu’s Q2 earnings

In the quarter ended February 2020, Richelieu’s sales rose by 10.2% YoY (year over year) to $249 million. However, analysts expect its sales tank by 19% YoY to $228 million in the second quarter. The company started witnessing the COVID-19 outbreak’s negative impact on its business in late March. This is the main reason for analysts’ weak expectations for Richelieu’s Q2 sales.

Similarly, the pandemic is expected to hurt the company’s EBITDA. Analysts’ consensus estimate reflects about a 32% YoY decline in its second-quarter EBITDA. Richelieu’s EBITDA margin is also estimated to decline to 9.2% — lower as compared to 10% margin in Q1 and 10.9% in the second quarter of fiscal 2019.

What else should you expect?

Investors and analysts would keep a close eye Richelieu’s second-quarter event, as it will help them realistically set their expectations from the company’s fiscal 2020 financials. This event will also help us take a peek at the key steps Richelieu’s management could be taking to minimize the pandemic’s negative impact.

Richelieu made three new accusations in Q1 — including Decotec and Mibro in Canada and O’Harco in the Unites States. On an annual basis, these new acquisitions added nearly $60 million in its total first-quarter revenue. The company expects these new accusations to lead to sales synergies across its network. It would be interesting to see if these three new accusations continue to support Richelieu’s overall business in such tough times.

Is it the right time to buy its stock?

Unlike many other companies that have seen significant pandemic-related headwinds, I find Richelieu’s hardware business to be much safer at the moment.

The company’s wide variety of specialty products includes hardware for home as well as for offices. During the COVID-19-related closures, many people started staying home longer to work remotely. I believe Richelieu might report better-than-expected sales for its home hardware products in the second quarter — helping it minimize the pandemic-related headwinds in its office hardware business segment.

In 2020 so far, Richelieu stock has risen by 8.1% as of July 6, while the S&P/TSX Composite Index has lost 8.2%. The stock is trading at $29.70 on Tuesday. It is the third time it has crossed $29 price level to test a major resistance near $30.

If the company manages to either meet or beat analysts’ second-quarter earnings expectations, it could trigger buying spree in its stock and take its price above $30 resistance. This is the reason why I would recommend buying Richelieu stock right now with a proper risk-management strategy in place.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jitendra Parashar has no position in any of the stocks mentioned.

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