RONA Inc.(RON)–One of My “Diamonds’ in the Rough” Received a Bid!

Buying cheap stocks, so called value plays, can be fun and profitable.  This morning the investment public was made aware of a takeover bid made on July 8, 2012 for Rona shares.  Lowes Cos. (LOW) made a takeover bid for Rona at $14.50 Canadian dollars per share.

Back on March 1, 2012, I highlighted two Canadian stocks that I called Diamonds in the Rough?  You can read the post here.  The two securities were Rona Inc. and Dorel Industries.

Rona (RON)

I have reproduced our RON model price chart, which I included in my blog, on March 1, 2012.  As readers can see, Rona was hugging our EBV-3 line, using this line for support.  What caught my eye was the breakdown into EBV-3 and subsequent recovery (November).  This is what I call “breaking out of the blue”.  I have written many times of this investment strategy and its’ profitability.

Here is our Model Price chart for RON as at February 29, 2012.

Rona Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Evaluation of Lowes $14.50 Bid

Let’s start with last night’s chart.

Rona with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of RON subsequent to this post will be maintained on Facebook, here.

As you can see from our model price chart, we have a model price, which is our fair market value, of $18.60.  Next year’s model price is calculated at $20.08, which appears in our database and not on the chart above.  Lowes offer is low, and the Board of Directors was right to reject the offer.  In my opinion, Lowes would need to offer at least say $22 a share, which would be at EBV+2, in order to get this deal done which would be a slight premium to our calculated model price.

Well, lets’ see what happens.  Since my blog on March 1, RON shares will be up some 50%!  (Assuming, shares of RON trade at $14 on the open, with the $9.37 cost on the date of my original post).

2 responses to “RONA Inc.(RON)–One of My “Diamonds’ in the Rough” Received a Bid!

  1. chris flanagan July 31, 2012 at 10:04 pm

    Brian, rona shows an “asset” on their balance sheet of hundreds of millions for goodwill. I see a company with massive debt problems here. Am I missing something?

    • ModelPrice Guy August 7, 2012 at 11:19 am

      Thanks for the question Chris!

      One of the great aspects of this work is the market will tell you whether goodwill on the balance sheet is “Good” goodwill or “Bad”. Once a company trades below EBV-3, the market is telling investors that the assets on the balance sheet are NOT the value that’s recorded on the balance sheet. As an investor, this will alert you, to look at the asset side of the balance sheet to see what assets maybe impaired. The most obvious can be goodwill from previous acquisition(s). Rona, as I stated in my blog, traded below EBV-3, and quickly retraced back above EBV-3 in November. This told me Rona’s stated assets including its recorded goodwill; in the eyes of the market was OK.

      As far as debt is concerned, I calculate a “Solvency Ratio” of 1.55. Please review my Solvency concept under Key Concepts tabs of this blog.

      I know these are new concepts and NOT written in any finance textbook. However, when I learned these concepts trading and investing were a lot easier and profitable!

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