Is RONA Building A Dynasty?

In a previous post, I discussed my thoughts on Home Depot (HD) after spending many hours in my local store. In addition to Home Depot, I have also visited my local RONA store on several occasions. RONA has never really excited me because they don’t pay a dividend. However, I decided to look further into their operations this past week.

Rona, which operates a network of 671 franchise, affiliate and corporate stores, said it plans to open 10 more new stores in 2007, after opening four as of August. It also said it is studying 15 acquisition targets and it is confident a number of them will materialize.

“We’re in a period that is very conducive to consolidation, and we have our eye on transactions that will allow us to improve our position and expand our product and service offering to consumers,” said Robert Dutton, president of Rona.

RONA has recently acquired 100% of the operating assets and real estate of British Columbia’s #1 Timber Supplier, Dick’s Lumber. This transaction follows RONA’s Curtis Lumber and Mountain Building Supplies acquisitions in 2006 and the addition of 14 stores in British Columbia in the past two years through store openings and the recruitment of independent dealers.

With the addition of Dick’s Lumber three specialized stores in the Vancouver Area, RONA will have 54 stores in B.C. A positive data point for RONA this week was Lumber and Building Materials (LBM) prices, which have been a drag on sales and profit margins for RONA since 2005 but are seemingly reversing.

It is expected that LBM prices will continue to be stable-to-improving and this momentum should continue into Q4/07. Over the past 20 months, home improvement retailers’ P/E multiples compressed from the high teens (or even low twenties) to the current levels in the low teens, on a forward-looking basis.

Home Depot (HD) and Lowe’s (LOW) are trading at 15.0 times and 15.4 times forward earnings, respectively, while RONA is trading at 12.7 times forward earnings, despite posting superior ROE and ROIC over the past 12 months. Many analysts believe that home improvement retail stocks are vastly correlated, and RONA’s stock price movements tend to lag those of Home Depot and Lowe’s.

RONA has exhibited very good growth over the past few years. Here we will take a look at RONA’s growth numbers compared to the industry.

RONA Industry

Sales (MRQ) vs Qtr. 1 Yr. Ago 9.14 – 1.09
Sales (TTM) vs TTM 1 Yr. Ago 11.54 – 2.39
Sales – 5 Yr. Growth Rate 19.93 – 13.13
EPS (MRQ) vs Qtr. 1 Yr. Ago 7.42 – 2.00
EPS (TTM) vs TTM 1 Yr. Ago 1.03 -(5.31)
EPS – 5 Yr. Growth Rate 35.74 – 20.27
Even though RONA is trading at a discount to its peers on a Price to Earnings level, they still lag their peers in other categories. Here are a few categories where RONA is performing below the industry.

Return On Assets (TTM) 8.29 – 9.65
Return On Assets – 5 Yr. Avg. 9.77 – 12.04
Return On Investment (TTM) 11.59 – 13.54
Return On Investment – 5 Yr. Avg. 14.15 – 16.40
Return On Equity (TTM) 16.69 – 20.04
Return On Equity – 5 Yr. Avg. 18.61 – 21.26

As you can see, there is a lot to learn about RONA. They appear to be growing at a nice rate, but since they do not pay a dividend, Dividend Money is not interested in purchasing the stock at this time.

Disclosure: The author does not own shares of RONA.

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