June 21, 2000
Premdor's positive earnings trend continued into the first quarter of
2000 with its 16th consecutive quarter over quarter improvement.
Earnings per share grew 5% to US$0.23. This steady earnings growth was
supported by the company's highest-ever quarterly sales of US$313.2
million. Of the 18% growth in sales, 75% was internal with half of that
generated from Dorfab, the company's door fabrication division.
Dorfab is another ingenious strategy formulated by Premdor. This
division produces value-added products by purchasing doors from Premdor
and enhancing the door's structure by adding extras such as hinges,
locksets and doorframes. By turning out complete entry systems, Premdor
is creating a more consumer friendly product for the big box retail home
centres to sell. Combined with other initiatives Premdor has expanded
into different types of markets. In the first quarter, Premdor
established three new Dorfab locations in the United States and
increased the production capabilities of three plants to support the
continued growth of retail home centres. The company has also completed
the acquisition of Steelwood Door from its strategic alliance with Royal
Group Technologies Limited.
While Premdor's stock price has appreciated over the past couple of
months, we believe that it has not yet attained our target price. Our
confidence has been reinforced with Premdor's ability to generate sales
through new products, strategic supplier relationships and acquisitions.
Though there is concern that rising interest rates could damage the
North American housing market, we feel that Premdor has substantially
offset this potential negative economic factor through geographic
diversification and the strategy of skillfully positioning itself in the
home renovation business.
September 8, 2000
It is encouraging to see CEO Philip Orsino continuously searching out
new growth opportunities for Premdor. Most recently, on August 22,
Premdor announced that it is in discussions to acquire Masonite
Corporation from International Paper Company. While Premdor and Masonite
have already formed a strategic alliance, this new strategic ploy could
lead to immense opportunities for both parties involved.
Masonite is world-renowned and is the premier manufacturer of door
facings in the world. It sells its products to door manufacturers and
building material distributors worldwide, under such banners as
Craftmaster and MiraTec. The possible synergies between the companies
are obvious. This potential purchase could lead to significant cost
reductions, economies of scale, and new product development.
The companies are still in deep discussions but a substantive
announcement should be made very shortly. A number of issues are still
outstanding, such as the method of financing and the name that the new
products will be marketed under. Meanwhile, we are confident that
Premdor continues to be an attractive fundamental value stock with
considerable takeover potential.
November 10, 2000
Unfortunately, recent events have caused disgruntled investors to put
downward pressure on Premdor's stock price. It all began in early
September when Premdor announced that it was in discussions to acquire
Masonite Corporation from International Paper, leaving Premdor victim to
the share price slide that many acquisitor's experience. Since then,
Premdor and Masonite have signed a definitive agreement for Premdor to
purchase Masonite for US$523 million, pending regulatory approval.
The uncertainty surrounding the method of financing for the purchase
was the next questionable issue for investors. Though the final details
are yet to be complete, CEO, Philip Orsino's intention of a 100% debt
financing with a possible equity issue in the future did not fare well
with the market driving the stock down to its current $7.00 level.
In the midst of these discussions, Premdor reported its third quarter
2000 results. While sales for the quarter increased 9%, its earnings per
share of $0.10 compared to $0.29 to third quarter of 1999 were
disappointing. Premdor's earnings decrease was impacted by a one-time
product line write-down at its Costa Rican plant of about $0.14 per
share. In addition, the European fuel crisis and Dorfab start-up costs
affected the quarter by about $0.05 per share.
While the debt financing will put some additional stress on Premdor's
balance sheet, Philip Orsino is a seasoned businessman and has
previously integrated over 45 acquisitions with Premdor. This gives us
some comfort that Masonite is something Premdor can handle. At this
point we will continue to keep a very close watch on the actions of
Premdor's management and the status of its year-end results. In the
meantime, we will wait for the rash selling of venting investors to come
to a halt, in hopes that the share price will firm up in the near
March 23, 2001
Over the past few months Premdor's share price fell victim to a
volatile stock market and investor pessimism with regards to the pending
Masonite acquisition. But in the midst of all this carnage, Premdor has
managed to report year-end results in line with investor expectations.
Fiscal 2000 earnings per share before an extraordinary write-down were
US$1.00 versus US$1.02 in 1999. In this same period sales displayed
strong growth with an increase of 13%.
Taking into account the weak economic and stock market conditions
that have been put before us, 2001 is shaping up to be a year of
uncertainty. However, Premdor has positioned itself as a diverse and
vertically integrated company, which may be more apt to weather an
economic storm. In addition, the outcome of the planned Masonite
acquisition has yet to be determined, although a regulatory decision is
expected by the end of March. Nonetheless, while we feel that these
unpredictable factors may continue to put pressure on its stock price,
we believe that Premdor remains fundamentally undervalued.
May 25, 2001
Since the announcement of Premdor's intention to purchase Masonite in
September 2000, nervous investors have been unforgiving and its share
price has experienced extreme pressure and volatility. But over the last
month, we have seen it move back up to the $10 level. Premdor is
sensitive to the economic environment and we feel that lower interest
rates have helped to precipitate this move.
Currently, Premdor is still in discussions with the U.S. Department
of Justice in order to obtain approval for the Masonite acquisition. The
pre-merger waiting period under Hart-Scott-Rodino Antitrust Improvements
Act has been extended while these discussions continue.
In the meantime, we may see continued volatility in Premdor's stock
price but we are optimistic that interest rate cuts and its stable
earnings in an unpredictable climate will act as added support during
this period of economic uncertainty.
July 20, 2001
It has been almost 10 months since Premdor first announced its
intention to purchase Masonite. Initially, investors were very hesitant
to accept the potential benefits which could be realized. They were
unable to look past the huge debt that would be placed on Premdor's
balance sheet. But during the long regulatory approval process investors
became much more optimistic. Fortunately, in that time financing charges
declined with interest rates having dropped 275 basis points since
January 2001. Investor's views of Premdor began to reverse appreciating
its share price to a current $14.00 from a low of $5.35 in December
2000. This prompted management to announce an equity issue that will
close on August 10.
The easing interest rate environment has proven to be very beneficial
to Premdor. Last week a restructured purchase agreement was revealed.
The new deal, which is $48 million less than the original will be
comprised of $300 million in cash funded from a $700 million, 7-8%
senior credit facility and a new equity issue of a minimum of 7,150,000
common shares at $14, representing an aggregate amount of $100.1
million. It also includes a subordinated note due to International Paper
for $175 million with an interest rate of 11.25% the first 3.5 years and
15% thereafter. If this note is not paid within the 3.5 years an
additional $25 million will be due. Mitigating the pressure of the
additional debt that will be taken on by Premdor is the sale of
Masonite's Towanda plant. The proceeds of this sale will be directly
applied to senior debt. Management expects to fetch $135-$170 million.
The new deal and financing plans provide a higher comfort level but risk
is still imminent. Premdor's balance sheet will be highly leveraged with
a debt to equity ratio of about two times. Countering this risk level is
management's commitment to improve its balance sheet in order to attain
a BBB credit rating.
While waiting for the door to close on the Masonite acquisition,
Premdor has managed to impress investors with better than expected
second quarter earnings of $0.30 versus $0.28. The manufacturing
industry has seen recessionary times but Premdor's 5% organic revenue
growth for the quarter was indicative of relatively stable housing and
In conclusion, we view the Masonite deal as a high risk/high reward
opportunity. Investors anxiously await its closure. This acquisition
should initially provide about $20 million in synergies and significant
long-term growth prospects. Premdor's continued progress and a firm
economy are crucial to the company's performance in the second half of
the year. We will continue to closely monitor the stock price as it has
just reached new 12-month trading highs.
October 26, 2001
On August 31 Premdor completed its acquisition of Masonite and
effective January 1, 2002 it will change its name to Masonite
International Corporation. We feel the name change is befitting, as it
is indicative of the internationally recognized Masonite brand and will
further enhance the company's presence around the world.
Going forward management has outlined its objectives as growth and
debt reduction. Based on CEO, Philip Orsino's aggressive track record we
feel that these goals are attainable. While Premdor's share price at
$12.90 has appreciated 18% this month and 146% from its 52-week low in
December 2000, we look forward to further share price appreciation as
the company improves its balance sheet and achieves its growth
November 16, 2001
Since our last update Premdor has continued to climb upward, hitting
a 52-week high of $16.60 on November 16, 2001. As we previously
commented, Premdor has become a “show me” type stock as uncertain
investors watch and dissect its every move. In our view, based on third
quarter results Premdor has shown that it can perform.
Premdor reported third quarter 2001 earnings per share of US$0.31
before non-recurring items versus US$0.24 a year ago. Premdor’s top
line growth, a 13.8% increase in sales, of which 11% was organic was a
major contributor to the quarter. Premdor’s better than expected
results are particularly impressive during these economically
We remain confident that Premdor’s management will adhere to its
objectives of growth and balance sheet improvement. We see evidence of
this with Premdor’s Dorfab operations, which are now profitable.
Moreover, the company plans to roll out its new wainscoting product
nationally over the next year. It has done well in its test market and
we expect it to become a profitable product for Premdor. In addition,
the integration of Masonite has gone well thus far and its extensive
research capabilities should contribute to further growth.
However, as a result of the Masonite acquisition Premdor’s balance
sheet has become heavily levered at 65% debt to total capital. Premdor
has indicated that it will use the sale of its Towanda facility towards
improving its balance sheet, along with future cash flow. The imminent
sale of this facility, rumoured to be worth US$110-$180 million would
significantly reduce Premdor’s debt ratios.
Premdor remains an attractive investment at this time. Deep interest
rate cuts have created a favourable macro economic environment for
Premdor to operate in. As Premdor’s share price further appreciates we
will re-evaluate our position.
March 28, 2002
For the fourth quarter of 2001, Masonite was able, once again to
report better than expected earnings. Earnings per share for the fourth
quarter were $0.27 versus $0.24 and for the full year were $1.07
compared to $0.99 excluding non-recurring items. Not only has the
favourable environment of a strong home building market and home
renovation sector been a main driver behind Masonite's impressive
results but its strong revenue growth and margin expansion has also been
In fact, Masonite's sales increased 20% in the fourth quarter with
2001 sales climbing to $1.42 billion. Although the acquisition of
Masonite assisted in this growth, 50% of it was organic. Masonite has
been able to continue to grow sales through new product offerings and a
favourable economic environment.
While the fourth quarter was a beneficiary to a positive macro
economic environment, we may begin to see a slowdown later in the year
as interest rates and mortgage rates increase. But despite this
potential slowdown we expect Masonite to continue to do well as margin
expansion continues. Fourth quarter operating margins came in at 11.4%
compared to 8.7%. We expect this trend to continue as the Masonite
purchase is further integrated into the company.
Masonite continues to trade at a discount to its peers, primarily due
to its highly leveraged balance sheet. Management has indicated that it
expects to end fiscal 2002 with a debt to equity ratio of 1:1. It
currently stands at 1.7:1. With strong cash flows and the sale of the
Towanda plant we feel that this is a viable goal.
Although at $24.30 Masonite's share price has appreciated
significantly since it was originally featured as a Value Favourite, we
continue to feel it is undervalued relative to its peers and continues
to be a stable, core holding.
August 2, 2002
Masonite, like most other stocks in the sector, has pulled back from
its recent highs on concerns that the housing market is slowing.
However, Masonite's second quarter earnings release again provides an
indication of the Company's growth potential. Sales increased 15% to
$415.5 million and earnings per share increased 40% to $0.42 from $0.30
in the comparable quarter the previous year. Also of interest, Masonite
prepaid its subordinated long-term debt of $125 million, which will
boost earnings per share by $0.15 on an annual basis. Management seems
committed to debt reduction and the debt to equity ratio has fallen from
1.7 on December 31 to 1.2 as at the end of the second quarter with a
target of 1 to 1 by the end of 2002. We simply cannot argue with
management's accomplishments, our only concerns surround the Company's
February 28, 2003
After a tremendous year for the North American housing market,
Masonite has reported equally impressive financial results. Sales in
fiscal 2002 increased 14% to reach US$1.62 billion from US$1.42 billion
in fiscal 2001. Net income increased 70% to US$85.2 million from US$50.3
million. Earnings per share increased 51% to US$1.62 from US$1.07,
excluding unusual items. Bottom line growth outpaced top line growth due
to productivity and process enhancements, relatively stable fixed costs
and a shift to a higher margin product mix. The gross margin improved to
22.6% from 18.8%, the EBITDA margin improved to 13.0% from 10.1% and the
net income margin improved to 5.3% from 3.5% on a year over year basis.
Cash flow from operations was used to reduce debt by approximately
US$175 million and the Company's net debt to equity declined to 0.89:1
from 1.66:1 the previous year.
Masonite is well positioned to continue to grow revenue and earnings
even if the housing market takes a breather in 2003. The Company has a
narrow product focus, essentially interior and exterior doors and
related components, which improves brand recognition. Sales are
approximately balanced between new home construction and home
improvement, which broadens the customer base. Masonite is also expected
to be able to grow sales of molded doors at the expense of other
products. Molded doors currently account for only 25% of the global door
market and are growing more rapidly than other segments. Finally,
Masonite's stable capital expenditure program will free up significant
cash flow that should be used to further reduce debt.
April 25, 2003
Shares of Masonite have been extremely volatile since the beginning
of the year, as investors weighed such factors as the war with Iraq,
housing data and earnings releases. Looking at the year-to-date trading
pattern, we believe that momentum players used the weaker than expected
new home sales in January (down 15%) as the trigger to unload their
positions. The stock declined precipitously, falling as low as $20.28 on
March 31, which was below 8 times consensus 2003 earnings. This multiple
was simply unwarranted due to Masonite's forecasted earnings growth rate
of approximately 15%. Not surprisingly, the housing data improved in
March and the oversold shares rallied almost 20% in April.
In addition to momentum-based selling, investors may have been
worried about the Company's first quarter earnings release. Several
competitors had reported weak revenue and earnings in the period because
of extremely harsh winter weather, falling consumer confidence and
higher energy costs. Despite these factors, Masonite reported first
quarter revenue growth of 6% to US$402 and earnings per share growth of
23% to $0.38. During the Company's conference call, management
reaffirmed its previous guidance, saying that "the annual results
for 2003 will be inline with analysts' expectations of earnings per
share of US$1.80 to US$2.00 or in the range of 11% to 23% higher than in
2002". They also reiterated their goal of generating free cash flow
to pay down debt. In short, we were quite pleased with the results and
we expect that the undervalued shares will continue to recover.
August 29, 2003
With the Federal Funds rate at 1%, the lowest level in 45 years, the
North American housing sector has been red hot. However, we believe that
we have seen the peak of the cycle. On August 25, the National
Association of Realtors reported that existing home sales for July rose
5% from June and 13.8% from July 2002, to a seasonally adjusted 6.12
million units, smashing the monthly record. The NAR suggested that the
back-up in long-term bond rates and the associated pop in mortgage rates
caused "fence-sitters" to jump into market before it is too
late. Further, the most recently released building permits data, a
forward-looking indicator, declined 2.4% in July to an annualized rate
of 1.78 million units. We are not forecasting the rupture of a bubble,
but simply that the peak has been reached.
Accordingly, we have sold our entire position in Masonite
International, formerly known as Premdor, a Value Favourite since April
2000. Although Masonite still appears relatively inexpensive on a price
to earnings basis, cyclical stocks tend to exhibit multiple contraction
at the top of the cycle. On a price to book basis, the stock is
currently trading at more than twice tangible book value, after
excluding the goodwill from the Masonite acquisition.
Management has done an excellent job in the past and the Company's
earnings growth may very well exceed 10% over the next few years.
However, as disciplined value investors, we have taken our cue to
reallocate capital. With the proceeds from the sale, we have purchased
several fundamentally undervalued stocks with greater upside potential.