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Investment Q&A

Not investment advice or solicitation to buy/sell securities. Do your own due diligence and/or consult an advisor.

Q: Circling back on Leon's Furniture as a stable dividend paying stock with hidden potential...


Furniture business is a tough one but Leon's is likely the best operator:
- there is no shortage of tough competition in this fragmented industry: Ikea, Costco, Wallmart, Sleep Country, Superstores and partially Amazon on-line & US shopping (although only subset of their inventory like electronics as people won't buy entire dining set on-line or load in their trunk across the US border).

- on the positive, landscape is also improving: bought their biggest / most direct competitor The Brick in 2013, Target is out of Canada, Future Shop closed and Sears Home is almost bankrupt.


Checking the financials, I was surprised to find Leon's actually growing despite tough Canadian economy: 2015 SSS: +1.2% and 2106 SSS: +4.1% - but based on above, to build a conservative case, I assume no sales growth going forward.


What struck my eye in the latest company presentation on their website is the likely financial improvement to come from internal synergies left from The Brick acquisition. Two slides caught my attention:

- "1% SG&A reduction = $20M savings": classical Leon's ran at ~32% while post-Brick, it shot up to 37.5%. In 2016, it finally started coming down to 36.5% with IT systems integration late 2015. Assuming it can continue synergies and get 1% down yearly over the next 4 years, it would add $0.24 to EPS yearly ($20M/83M shares).

- "$50M per year for debt repayment": From MD&A, current debt is $240M after $50M was indeed repaid in 2016. interest at ~3% so yearly interest expense savings of $0.03 yearly ($240M/$50M = 4.8 years; $13.3M interest / 4.8 years = $2.77M and $2.77/83M shares = $0.03).

- 2016 EPS was $1.05. Even with no growth, SG&A and Interest reduction could add $0.27 in 2017 (0.24+0.03) - with same savings target over next 4 years bringing to 2020: SG&A to 32.5% (pre-Brick acquisition) and almost all debt paid, with EPS up to $2.13. Even if hit only part of these targets, there is a lot of potential internal clean-up to improve financials.


A couple of other supporting item to thesis:
- Very aligned Management as Leon family owns 67% of the stock;
- Own most of their real estate, some rumors of possible REIT spin-off last year to unlock value;
- 20% dividend increase last quarter after a few years flat;
- Insider buying (Mark Leon bought 52K shares on March 8 for ~$900K)


Now back at ~$17, valuation seems modest compared to its 10-year average. LNF seems a good value stock - flying under the radar. Is above reasonable / realistic thesis? Thanks for your comments!
Read Answer Asked by Jennifer on April 09, 2017
Q: I consider WSP and STN my core holdings but now due to excellent appreciation they represent 7% and 3% of my portfolio. ARE has been a laggard and represents 1%. With ARE should I go back to SNC which I owned in the past (upside due to the recent acquisition?) or just keep WSP and STN as the only stocks in this area?
Read Answer Asked by JR on April 09, 2017
Q: I have a significant exposure to HCG which I want to reduce. I have been slowly selling some of my HCG shares the past few years, but I incur significant gains that I must pay taxes. My average cost is less than $3.00 per share. I was thinking of buying more HCG shares to increase my average cost and then sell within the year thereby paying less taxes. Do you think this is a sound strategy?
Read Answer Asked by Robert on April 09, 2017
Q: I have cash in my children's RESP which I will withdraw in September. TPH.DB.E, a convertible debenture is maturing on September30, about the time I need to do the withdrawal.It is yielding over 7% (3.5% for 6 months) much better than other 6 month returns. Now that Morguard is the majority owner do you think this provides more safety making it more likely that the debenture will be paid out at face value at maturity. Does the company have adequate resources to mature the debenture?
Read Answer Asked by Robert on April 09, 2017
Q: Hi 5i, As one who remembers double digit interest rates, I've been wondering if and when the worm will turn again. It sounds like expectations are becoming pretty entrenched for higher rates in the US, and if that turns out to be true would expect Canada to follow with a year or two lag. Is there a typical pattern or approach that suggests which sectors and investment types benefit in a rising rate environment?

Thx for your excellent service!
Read Answer Asked by Rick on April 09, 2017
Q: Enbridge issued a press release regarding an unsolicited mini-tender offer made by TRC Capital to purchase up to 2,500,000 common shares or Enbridge at a price of $53.38 per share which is 4.47% discount as of April 6, 2017 closing price. This type of mini-offers has happened to other publicly traded companies. What are the possible reason(s) for a company such as TRC Capital make an offer at a discount below market and believe this offer would be accepted? Perplexed… Thank you.
Read Answer Asked by Karen on April 07, 2017
Q: Do you know of a good site to get a list of the largest market gains and losses during the trading day. It would seem like a relevant piece of data, but I haven't been able to locate it.
In addition, do you know a site which shows the list of largest absolute dividends paid by Canadian and us companies? In Canada the banks must lead the pack. In. The us I'm thinking xom or the big telcos. If not, wondering if other readers know. Thanks in advance.
Read Answer Asked by Bill on April 07, 2017
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