CANADIAN TIRE CORP. $70 - Toronto symbol CTC.A

CANADIAN TIRE CORP. $70 (Toronto symbol CTC.A; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 81.1 million; Market cap: $5.7 billion; Price-to-sales ratio: 0.5; Dividend yield: 2.0%; TSINetwork Rating: Above Average; www.canadiantire.ca) operates 490 Canadian Tire stores, which specialize in automotive, household and sporting goods. The company owns these stores, but franchisees operate most of them. Canadian Tire also operates 299 gas stations and 87 Part Source auto parts stores.

In the past few years, the company has diversified its product lines by purchasing retailers with specialized products. These include Mark’s, which sells casual clothing though 386 stores, and Forzani Group, which sells sporting goods through 495 outlets, mainly under the Sport Chek banner. As well, Canadian Tire will soon complete its $85- million purchase of Pro Hockey Life, which sells hockey equipment through 23 stores.

Strong recovery after recession

The recession and low gasoline prices cut Canadian Tire’s sales by 4.8%, from $9.1 billion in 2008 to $8.7 billion in 2009. However, sales quickly turned around and rose 31.6%, to $11.4 billion, in 2012.
Due to the lower sales, earnings fell 10.9%, from $4.60 a share (or a total of $375.4 million) in 2008 to $4.10 a share (or $335.0 million) in 2009. Earnings rebounded with sales and jumped 48.8%, to $6.10 a share (or $499.2 million), in 2012.

Besides acquisitions, Canadian Tire continues to do a good job of upgrading its older stores. These improvements make it easier for store managers to move faster-selling seasonal merchandise to high traffic areas of the store. Other upgrades, such as better signage, wider aisles and brighter lighting, have also attracted more customers. In addition, Canadian Tire is testing a smaller-store format for malls and densely populated urban areas.

Finance division is an overlooked asset

Another area of growth is the company’s financial services division, which issues credit cards, offers no-fee savings accounts and sells insurance. This division supplied just 9% of Canadian Tire’s overall revenue in 2012 but accounted for a high 41% of its pre-tax earnings.

This business continues to benefit as more shoppers use credit cards to pay for their purchases. As well, more cardholders are paying their bills on time: Canadian Tire wrote off 6.58% of its credit card receivables in the fourth quarter of 2012, down from 7.32% a year earlier.

Canadian Tire’s strong balance sheet will let it keep investing in new growth initiatives. Its long term debt of $2.3 billion is a high, but still manageable, 40% of its market cap. It also holds cash of $1.2 billion, or $14.60 a share.

Low p/e for a Canadian icon

The stock trades at just 10.4 times the $6.76 a share that Canadian Tire will probably earn in 2013. The $1.40 dividend yields 2.0%.

Canadian Tire is a buy.

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