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Canadian Tire Corp. $70 – Toronto symbol CTC.A

CANADIAN TIRE CORP. $70 (Toronto symbol CTC.A; Conservative Growth Portfolio, Consumer Growth Portfolio; Shares outstanding: 81.7 million; Market cap: $5.7 billion; SI Rating: Above average) and its associated dealers operate 465 stores that specialize in automotive equipment, home improvement and sporting goods. The group also operates 260 gas stations, 60 auto parts stores and 330 Mark’s Work Wearhouse casual clothing stores.

Canadian Tire saw the threat from Wal-Mart in the mid-1990s, and began to replace its older stores with bigger ones. It also developed a new store format it calls “Concept 20/20”, which tends to generate higher customer traffic and sales than its regular stores. About 20% of Canadian Tire’s stores now use this format.

Like Loblaw and Sobeys, Canadian Tire has also overhauled its distribution networks and computerized its inventory control systems. Ongoing savings from these investments will help Canadian Tire stay competitive.

The company is also making good use of its sizable real estate assets. It recently agreed to sell and lease back two distribution centres, and sold some surplus property in Toronto. That gives it more cash to invest in its stores.

Another area of growth is the finance division. The company’s recent banking license lets it offer a wider variety of financial products and services, like GICs and mortgages, in addition to its long-time credit card business. This operation now accounts for roughly 30% of Canadian Tire’s profits.

Steady revenue streams from the finance operation also cut Canadian Tire’s exposure to seasonal fluctuations in its core retail operations.

For example, unusually warm weather in Ontario and Quebec has cut demand for winter goods such as snow shovels and winter tires. This will cut Canadian Tire’s profits in the fourth quarter of 2006 by about $0.05 a share.

The stock moved down on the news, even though total retail sales rose 4.8% in December. It now trades at 16.5 times the $4.24 a share it probably earned in 2006. Profits in 2007 could reach $4.90 a share, which implies a p/e of 14.3.

The company has raised its dividend each year for the past three years. The current annual rate of $0.66 dividend yields 0.9%.

Canadian Tire is a buy.

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