Of all the nations which rely on immigration to supplement their workforce, Canada's current strategy to boost immigration for economic gain is the most aggressive among its peers. Canada is among the most immigrant-reliant advanced economies in the world. Before the pandemic, net migration accounted for more than 80% of Canada’s population growth, compared with about 40% in the U.S. While the Covid pandemic dealt a blow to immigration, the Canadian government hopes to make up for that shortfall due to the pandemic by increasing the number of permanent residents it admits to 401,000 this year, about 60,000 more than its pre-pandemic intake and the equivalent of a little over 1% of the country’s current population. The target level will rise by a further 10,000 during each of the next two years.
In contrast, in the U.S., the Trump administration suspended most visas for people not already in the country last spring, citing risks to the domestic job market during the economic recovery. The Biden administration has continued that policy. The UK government, which transitioned to a more restrictive system after Brexit, has said the new rules would likely curb the overall flow of migrants to the country. In Australia, a strict pandemic border policy has contributed to a sharp drop in immigration that is expected to continue over the next two years.
The growth in population will have a multiplier effect on housing and housing related sectors like furniture and major appliances in Canada. As immigrants come into the country, one of the first things they want is to buy furniture, and eventually, as they buy houses for their families, more furniture and appliances. This is a good segway to discuss one of my favorite investing ideas in Canada to play the coming immigration boom, Leon's Furniture (TSX:LNF, Financial).
Leon's Furniture Limited
Leon's Furniture (TSX:LNF, Financial) is the largest furniture and appliance retailer in Canada. Leon's first opened its doors in 1909 in Welland, Ontario. It's well known to Canadians for its annoying TV ads and "don't pay a cent events." The company, owns 303 furniture stores in Canada, including Leon’s and The Brick, as well as a large e-commerce business as well as ancillary businesses for extended warranty, support and service and financing.
The Canadian furniture brand was founded in 1909 by Ablan and Lena Leon, who emigrated from Lebanon to Canada in the early 1900s. The Leon's went on to have 11 children and 63 grandchildren, with many of the clan's members going to work in the family business. The controlling interest in the company (about 50%) is owned by the Leon family via holding companies. The company is the largest furniture retailer in the country, has stores in all provinces of Canada and has 20% of the furniture market.
In 2013, Leon's acquired competing furniture chain The Brick for $700 million. In 2016, Leon's took over eight Sears Home stores, which allowed it to expand into British Columbia. The Leon clan still retains tight control over the business even though recently a non-family CEO, Mike Walsh, has taken the reins for the first time.
Leon's has outperformed the S&P/TSX (^GSPTSE) index over the last 15 years.
As we can see, Leon's has benefited from the pandemic and the work from home (WFH) phenomena. People have heavily invested in home furnishing over the last year and a half. The growth rates per share given in the table below have been impressive over the last decade. I think this boom will continue as the new immigrants will take the baton from the current residents. Plus, we have the secular tailwind of the millennial generation entering their prime family formation (and furniture buying) years.
| Fiscal Period | 10-Year | 5-Year | 1-Year |
| Revenue | 12.60% | 1.80% | 18.90% |
| EPS without NRI | 8.70% | 12.20% | 44.20% |
| EBITDA | 12.00% | 16.80% | 15.30% |
| Free Cash Flow | 20.90% | 54.30% | -20.70% |
| Dividends | 5.40% | 8.80% | 10.70% |
| Book Value | 8.70% | 9.00% | 7.40% |
| Price | 10.00% | 11.60% | 40.60% |
The balance sheet is in excellent shape with no long-term debt. In addition, Leon's owns a lot of real estate upon which its stores are situated, and which is carried on its books at cost. The dividend is a decent 2.65% and it also pays an intermittent special dividend (it paid a special dividend of 1.25 Canadian dollars ($1.00) in September 2021). Leon's has grown its dividend at a nearly 9% per annum pace over the last five years. It has also announced a further 5% stock buyback. All in all, it has a lucrative forward shareholder yield of over 12%. This is a very shareholder-friendly company, which makes sense given that the founding family is a significant shareholder and controls the company.
On a 10-year median price-sales and price-book basis, Leon's appears to be fully valued, and on 10-year median price-earnings basis, the company appears undervalued. However, the earnings are currently super-normal because of work from home, and I think they will normalize in the coming quarters.
Leon's return metrics are healthy and exceed the cost of capital, as shown in the chart below.
Conclusion
Most of the GuruFocus valuation metrics show Leon's to be undervalued.
The company is a cyclical retail company and is very much leveraged to the economy and interest rates, so investors need to take price volatility in stride. I think Leon's real potential is that it is a very well managed company, with good growth potential, a great balance sheet and a fair price in a generally high priced market.
The Leon family have been good stewards of the company. In this regard, Leon's reminds me of the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) company Nebraska Furniture Mart in the U.S., whose motto is "sell cheap and tell the truth."
Interestingly, well known Canadian value investor Prem Watsa (Trades, Portfolio)'s Fairfax Financials owns 9% of Leon's. Given the demographic tailwinds favoring Leon's, I think it will continue to deliver a return on investment of around the 10% range per annum in the decade ahead. Leon's is the dominant purveyor of furniture and appliances in Canada, which is now the premier immigrant nation in the world, and I believe it has a long runway ahead of it.
