Good job with your part. 3! I readed comments also and I think we focusing too much on the house bubble. The most important factor for RCH is Interest Rate and % of house aged 35 years and more.
- First the age of house is very important to know if people will remodel/renovate their house or not, about this, perspective at US is very good for RCH.
- Interest Rate :: this is the most important factor and we cannot compare with 2001/02 and 2008/09, why? Because they drop the rate during recession, so people can refinance take money from their house and renovate their house.
In addition, renovating a kitchen or a bathroom is very expensive, so many people would have to go into debt to do this renovation and the most common way is to refinance the house at 2-3-4-5%
I know many other factors need to be watched, but for me and in the short term, these factors are very important to understand price/margin/growth. That's why I don't think management will maintain their EBITDA margin at 14% and we should be back to ~11% margins.
Management is guiding margin of 14% LT. I trust management as very conservative. Also historically margin has gone to 11% only 2 times in 1998 and 2018. So it may go there but it will be temporary.
Your first point is that houses are very old and need renovation like they never did before... so that should sustain a high level of renovation. In terms of interest, I dont think 4-5% interest is very high... It will not prohibit people to do necessary renovation. Also if we have a recession, like in 2001 or 2008, short term interest will go down and the inverting yield curve state will stop as expected. I am not following the interest rate argument.
Finally, Management has stated that the US has 2/3 of Canada's margin and as such with a margin of 14% LT, means that Canada margin is 16.27% and in USA the margin is 10.85%. Richelieu is dominating the Canadian market. It is not going down much - pricing power!! For the US I believe the more they penetrate the market the better the margin will be. May be not go to 16% but the trend is there as Richelieu dominate the market more and more.
To be clear I don't say it's impossible for RCH to keep their marge but this should be very hard and they will choose between decrease revenue and keep margin or focus on revenue/growth and sacrifice margin.
Hello! Thanks for your great analysis. I personaly think that there are headwinds in the short term. For example, the consumer sentiment related to the macrotrends economic cycle could have some impact in the bussiness. The housing tendencies also should have some impact. I think the rise in the interest rate will affect housing.
However, the financial position is sound. The low part of the cycle is normally good to serial acquirers when they have an excelent financial position. In fact, they are expading themselves faster than ever taking into consideration the number of distribution center, especially in EEUU.
Even with a significat decline in Ebitda in 2023, it would be an atractive investment in the long run if we think the growth will accelerate later. I am considering to start a position. I think the time is with the shareholder in this case. Even if we are wrong about about the price and the decline is worse than expected I think the company will be still here and growing in the following years.
Yes they have gone into building new warehouses and new sector of the USA so that number will continue to increase in the hundreds!! There are 50 warehouses in Canada which is 10 times less populous. They are not not present in the western part of the US, so just with the geographical expansion, builiding warehouses in those location should create growth. The housing downturn is not demand driven but cost driven.. ie interest rate and inflation... so I think it will resolve itself. Once cost and consturction come down and house price comes down, building will resume. There is a lack of residential homes in Canada and US. NA is still growing in terms of population and with immigration. Also kitchen and bathroom as I said will be renovated even if house starts lags for a few years. As you said if we get a depression like the mid 1990 or 2009, in Canada or US , Richelieu has no debt and will survice in this environment. It is very conservative - no debt which is quite different from other companies.
Richelieu is suffering more from.a return to a normal days after a frenzy activity during covid where owners were spending tons of money on renovating kitchen etc instead of going to the beach in the Caribbean island . The data shows that housing price or housing start is not a major factor. Strong economical downturn like 2009 or 1995 are. Canada economy is vibrant strong immigration etc price of houses is coming down from elevated price of 2022 but ppl are still renovating kitchen. I think one way to look at it is forget about 2022 and treat it as a abnormal year and assume some growth from 2021 plus acquisition. On the organic vs inorganic I saw Max did something on this ... For me they will keep using the same playbook so not critical .. will get back to you on this
Ahh okay interesting thank you. So you are not too concerned about a potential housing market bubble/collapse but more so from a greater economic downturn? I understand that the 3 drivers for demand in the renovation/remodeling industry are the level of disposable income, the age of the housing stock and the overall house prices (greater house prices less likely to move house and buy a new one but rather invest in your own house) all of which have had tailwinds over the previous decades. I think RCH is a solid company and this year will be an interesting one for them. If you could ask management one question, what would it be? And where do you think the greatest potential weakness is in your thesis?
One tailwind is ff the interest stays high even if price comes down ... Ppl will be locked into their house to keep their current low interest mortgage
100% agree and if i understand correctly alot of Canadians have a fixed interest rate (as opposed to floating) - so unlikely to move as will mean higher interest/mortgage payments
One risk is that price may go down in 2024 once inventory at elevated price is purged and so 2024 may see some headwind there.. margin should be fine as logistics cost is lower also
Good job with your part. 3! I readed comments also and I think we focusing too much on the house bubble. The most important factor for RCH is Interest Rate and % of house aged 35 years and more.
- First the age of house is very important to know if people will remodel/renovate their house or not, about this, perspective at US is very good for RCH.
- Interest Rate :: this is the most important factor and we cannot compare with 2001/02 and 2008/09, why? Because they drop the rate during recession, so people can refinance take money from their house and renovate their house.
In addition, renovating a kitchen or a bathroom is very expensive, so many people would have to go into debt to do this renovation and the most common way is to refinance the house at 2-3-4-5%
I know many other factors need to be watched, but for me and in the short term, these factors are very important to understand price/margin/growth. That's why I don't think management will maintain their EBITDA margin at 14% and we should be back to ~11% margins.
I have a lot to say but I will stop here.
Management is guiding margin of 14% LT. I trust management as very conservative. Also historically margin has gone to 11% only 2 times in 1998 and 2018. So it may go there but it will be temporary.
Your first point is that houses are very old and need renovation like they never did before... so that should sustain a high level of renovation. In terms of interest, I dont think 4-5% interest is very high... It will not prohibit people to do necessary renovation. Also if we have a recession, like in 2001 or 2008, short term interest will go down and the inverting yield curve state will stop as expected. I am not following the interest rate argument.
Finally, Management has stated that the US has 2/3 of Canada's margin and as such with a margin of 14% LT, means that Canada margin is 16.27% and in USA the margin is 10.85%. Richelieu is dominating the Canadian market. It is not going down much - pricing power!! For the US I believe the more they penetrate the market the better the margin will be. May be not go to 16% but the trend is there as Richelieu dominate the market more and more.
I don't know if you talking about the same margin but you can see there ->
https://imgur.com/a/3P8oKmg
the avg is 11% (EBITDA), also we cannot compare before 2009 because RCH has changed a lot with their many acquisitions and their 3 factories.
They had 2 factories way back in the early 2000.
To be clear I don't say it's impossible for RCH to keep their marge but this should be very hard and they will choose between decrease revenue and keep margin or focus on revenue/growth and sacrifice margin.
Hello! Thanks for your great analysis. I personaly think that there are headwinds in the short term. For example, the consumer sentiment related to the macrotrends economic cycle could have some impact in the bussiness. The housing tendencies also should have some impact. I think the rise in the interest rate will affect housing.
However, the financial position is sound. The low part of the cycle is normally good to serial acquirers when they have an excelent financial position. In fact, they are expading themselves faster than ever taking into consideration the number of distribution center, especially in EEUU.
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Cánada 30 31 30 35 34 34 35 36 36 36 36 36 39 41 47 50
EEUU 15 16 18 23 24 24 25 28 28 31 31 34 36 41 57 59
Even with a significat decline in Ebitda in 2023, it would be an atractive investment in the long run if we think the growth will accelerate later. I am considering to start a position. I think the time is with the shareholder in this case. Even if we are wrong about about the price and the decline is worse than expected I think the company will be still here and growing in the following years.
Yes they have gone into building new warehouses and new sector of the USA so that number will continue to increase in the hundreds!! There are 50 warehouses in Canada which is 10 times less populous. They are not not present in the western part of the US, so just with the geographical expansion, builiding warehouses in those location should create growth. The housing downturn is not demand driven but cost driven.. ie interest rate and inflation... so I think it will resolve itself. Once cost and consturction come down and house price comes down, building will resume. There is a lack of residential homes in Canada and US. NA is still growing in terms of population and with immigration. Also kitchen and bathroom as I said will be renovated even if house starts lags for a few years. As you said if we get a depression like the mid 1990 or 2009, in Canada or US , Richelieu has no debt and will survice in this environment. It is very conservative - no debt which is quite different from other companies.
Sorry for the numbers. It is different in my excel, but the text is deform.
Hi Govro, thanks again for another great read! What do you think the greatest risk facing RCH is? There is a lot of concern for example around the housing "bubble" in Canada and that their earnings are potentially less resilient especially given the heightened Covid sales base. Others argue that there is a structural deficit in housing supply. From your piece i assume you believe that the concerns are exagerated and that the business will perform just fine over the short term. Keen to hear your thoughts here and also what you think the greatest risk is for the company. And how do you think about the potential organic growth of the company vs inorganic growth or do you not make any distinction here? All the best and thanks again! https://www.google.com/search?q=canadian+house+prices+relative+to+income&tbm=isch&ved=2ahUKEwis34Xq3qz-AhVii_0HHTdTAaEQ2-cCegQIABAC&oq=canadian+house+prices+relative+to+income&gs_lcp=ChJtb2JpbGUtZ3dzLXdpei1pbWcQAzIFCAAQogQ6BAgjECc6BwgAEIAEEBM6BggAEB4QEzoECCEQCjoECB4QClDnBlieMWDoMmgAcAB4AIABtQGIAa0QkgEEMTIuOJgBAKABAcABAQ&sclient=mobile-gws-wiz-img&ei=Cws7ZOytA-KW9u8Pt6aFiAo&bih=732&biw=393&client=ms-android-xiaomi-rvo3&prmd=insv#imgrc=o1_4dvhnoP0CsM&imgdii=rEUHDHlSQl-RRM
Richelieu is suffering more from.a return to a normal days after a frenzy activity during covid where owners were spending tons of money on renovating kitchen etc instead of going to the beach in the Caribbean island . The data shows that housing price or housing start is not a major factor. Strong economical downturn like 2009 or 1995 are. Canada economy is vibrant strong immigration etc price of houses is coming down from elevated price of 2022 but ppl are still renovating kitchen. I think one way to look at it is forget about 2022 and treat it as a abnormal year and assume some growth from 2021 plus acquisition. On the organic vs inorganic I saw Max did something on this ... For me they will keep using the same playbook so not critical .. will get back to you on this
Ahh okay interesting thank you. So you are not too concerned about a potential housing market bubble/collapse but more so from a greater economic downturn? I understand that the 3 drivers for demand in the renovation/remodeling industry are the level of disposable income, the age of the housing stock and the overall house prices (greater house prices less likely to move house and buy a new one but rather invest in your own house) all of which have had tailwinds over the previous decades. I think RCH is a solid company and this year will be an interesting one for them. If you could ask management one question, what would it be? And where do you think the greatest potential weakness is in your thesis?
One tailwind is ff the interest stays high even if price comes down ... Ppl will be locked into their house to keep their current low interest mortgage
100% agree and if i understand correctly alot of Canadians have a fixed interest rate (as opposed to floating) - so unlikely to move as will mean higher interest/mortgage payments
What is your handle icleaeview n twitter I want to make sure I am following you ;)
One risk is that price may go down in 2024 once inventory at elevated price is purged and so 2024 may see some headwind there.. margin should be fine as logistics cost is lower also
P.s. sorry for the long questions, and i only have a personal Twitter at the moment once i make a new one i will let you know
I used last 30 years and EBITDA margin is at 13%. One could argue that 2013 to 2018 margin was depressed because of aggressive USA expansion.