AutoCanada earned less in the first half of 2015. And its share price has fallen enough that it’s been reduced to the bargain basement stocks section at this price based on its expected earnings both this year and next. The company pays attractive dividends. It remains a buy.
We regularly review Edmonton-based AutoCanada Inc. (TSX─ACQ). Since April its shares have fallen by 25.2 per cent. This makes them cheaper and, as a result, AutoCanada is a bargain stock to buy for long-term price gains and attractive dividends that should eventually rise.
In the six months to June 30, AutoCanada’s shareholders earned $18.5 million, or 76 cents a share. This was down by nearly 22 per cent from earnings of $21.1 million, or 97 cents a share, a year earlier. Minority interests took part of this year’s profits.
In the first half, AutoCanada’s revenue jumped by 74.9 per cent, to $1.450 billion. This largely reflected acquisitions of dealerships. The trouble is its cost of sales and operating expenses as a group went up by 76.5 per cent, to $1.409 billion. Other items added under $3.2 million to this year’s earnings. This was less than $4.4 million a year earlier. Net finance costs rose to $14.7 million. This is over twice net finance costs of $6.9 million, a year earlier. Income taxes rose by 2.1 percentage points, to 27.9 per cent.
In the first half, AutoCanada’s net income of $21.5 million was a little above net income of $21.3 million, a year earlier. But non-controlling interests took nearly $3 million this year, versus nothing last year.
Lower cash flow gives opportunity for value investing
In the first half, AutoCanada’s cash flow plunged by 30 per cent, to $17.2 million. This confirms its lower profit. What’s more, the cash flow fell far short of acquisitions of $21.6 million, capital spending of $43.4 million, and dividend payments of $14.9 million.
AutoCanada held cash of $77.7 million on June 30. It carried debt of $302 million and revolving floor plan facilities of $608 million. Even if you exclude the revolving facilities, the company’s net debt-to-cash-flow ratio was a high 3.8 times. And it still plans to acquire six to eight stores by May, 2016. But debt due over the next year is just $15.2 million, excluding the revolving floor plan facilities. The long-term nature of most this debt gives it more financial flexibility. It has more time to earn and accumulate cash to repay the debt.
President and chief executive officer Tom Orysiuk said, “We are not satisfied and are working closely on a dealership by dealership basis to make the appropriate market sensitive adjustments to maximize all volume, gross and expense reduction opportunities.” At least management is facing the problems.
AutoCanada is diversified. It operates 49 dealerships in eight provinces. The company sells a wide range of cars. More important it’s growing in high profit areas: In 2014, AutoCanada operated 822 service bays to repair damage from collisions. In the first half, this business generated over a third of the gross profit. The company also sets up financing and insurance. This produced over 31 per cent of its gross profit.
Priced for value investors and it pays high dividends
AutoCanada formerly raised its dividend each quarter. For now, it remains at a dollar a share. This yields an attractive 3.8 per cent. The company expects to at least maintain its dividend. It writes: “The Company has sufficient capital to execute on our acquisition strategy, capital expenditure requirements and adequate liquidity to fund its cash dividend.”
In 2015, AutoCanada is expected to earn $1.90 a share. This would be a drop of 12.5 per cent from last year. Based on this estimate, the shares trade at a reasonable forward price-to-earnings, or P/E, ratio of 13.8 times. In 2016, the company’s earnings are expected to rebound to $2.70 a share. Based on this estimate, the shares trade closer to a bargain stock’s forward P/E ratio of 9.7 times.
AutoCanada remains a buy for long-term share price gains as well as high and rising dividends.
The Investment Reporter, MPL Communications Inc.
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