AutoCanada: a bargain stock for value investors

AutoCanada’s share price has plunged even though its earnings are expected to rise further this year and next. It remains a buy for value investors seeking a share price recovery and attractive dividends. AutoCanada is one of a very few high-quality bargain stocks for 2015.

We regularly review AutoCanada Inc. in The Investment Reporter. Between November and April, its shares plunged by over 30 per cent. With the share price down and the company’s earnings expected to grow this year and next, it remains a buy. Buy this bargain stock for long-term share price recovery and an attractive dividend yield of nearly three per cent.

AutoCanada is diversified. Geographically, it operates 48 vehicle dealerships and 56 franchises in eight provinces. This reduces its dependence on each region. AutoCanada is diversified across eight vehicle manufacturers. This lessens its exposure to problems such as strikes or disasters. AutoCanada sells 19 brands of vehicles. So even if consumer preferences change, so can the company. AutoCanada is also diversified by business. It sells used as well as new vehicles; its 822 service bays filled 786,000 service and collision repair orders in 2014; and it earns revenue from arranging for financial, insurance and other services of over $1 billion last year.

Its 2014 adjusted earnings per share jumped

In 2014, AutoCanada earned an adjusted $51.6 million, or $2.23 a share. This was up by 22.5 per cent from an adjusted $38.2 million, or $1.82 a share, the year before. The better results reflect both acquisitions and higher same-store sales and earnings.

Executive chairman Patrick Priestner said, “We are proud of our annual 2014 results and our growth in units retailed, revenue, gross profit and net income are reflective of the 17 stores we added. We are pleased with the dealerships we acquired this past year as they are integrating well into AutoCanada.”

In 2014, AutoCanada’s same-store sales rose by 8.9 per cent, to $1.4 billion. They climbed in all four businesses. The company’s same-store gross profit rose by 7.9 per cent, to $239 million. The gross profit rose in all areas except for wholesale used vehicles.

Challenges drove shares down to bargain stock price range

In 2015, AutoCanada will face more difficult markets. It found the first two months of 2015 and the last half of December, 2014, “very challenging”. The company decided against raising the quarterly dividend for the first time in a long time. AutoCanada has considerable scope to reduce its variable costs. This will assist the company in facing a number of headwinds this year.

Most important is the plunge in oil prices. This has led to layoffs and lower consumer confidence. If you’re not sure whether you’ll still have a job tomorrow, you’re likely to defer purchases of ‘big-ticket’ items such as cars. The company notes lower sales in Calgary, Edmonton and Grande Prairie, Alberta. Saskatchewan, too, will suffer from lower oil prices.

Rising production in the Middle East, the addition of oil from Iran and record oil stockpiles in North America suggest that oil will remain low. But AutoCanada sees a ‘silver lining’ in this. It knows that the plunge in the price of oil is hurting car sales in Alberta. But it makes this seem like almost a good thing.

AutoCanada will do some value investing of its own

AutoCanada writes that “should the Western economy continue for a period at a slower pace, management anticipates that acquisition multiples for Western dealerships will decline.” This would enable the company to expand in Western Canada on the cheap.

A second problem was the weather. Central Canada was in a deep freeze in February. Atlantic Canada faced record snowfall. Now that spring is here, car sales may improve in Central and Atlantic Canada. AutoCanada plans to grow in Central and Atlantic Canada as well as in Western Canada.

AutoCanada plans to add from three to five dealerships by the end of May. It boasts of “a strong balance sheet, available liquidity and cash flow.” But the company’s net debt of $685 million is a hefty 10.3 times its cash flow of $66.8 million. It also gives it a high net-debt-to-equity ratio of 1.8 to one. AutoCanada’s 2014 cash flow jumped by over 39 per cent. But it fell far short of investment of $331 million and dividend payments of $22.2 million. The company had to issue shares to help cover the shortfall.

AutoCanada Inc. (TSX─ACQ) is expected to earn $2.41 a share this year and $3.12 a share next. It is a buy for value investors looking for bargain stocks offering a price recovery and attractive dividends.

 

The Investment Reporter, MPL Communications Inc.
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