AutoCanada fuels expansion with new dealerships

Pat McKeough responds to many requests for advice on specific stock picks and other questions on investment and the economy from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle. This week, an Inner Circle member asked about a stock that has risen sharply this year. AutoCanada’s franchise car dealerships have profited from robust car sales and the company continues to expand. Pat looks at whether AutoCanada can sustain its growth and also measures the risk of its growth-by-acquisition strategy. Q: Hi Pat: I would like your comments on AutoCanada. Is it worth looking at? Best regards. A: AutoCanada Inc., (symbol ACQ on Toronto; www.autocan.ca) has 30 franchised car dealerships in six provinces. It sells numerous brands, but Chrysler vehicles supply nearly 75% of its revenue. The company aims to increase its number of dealerships by 20% over the next two years. That’s why it recently paid $3.8 million for People’s Automotive, a Volkswagen dealership in Grande Prairie, Alberta. It also paid $23.3 million for two dealerships in Winnipeg that sell Audis and Volkswagens. In addition, AutoCanada recently announced a deal to buy a large Chrysler dealership in Calgary. It did not reveal the purchase price, but this business had $68 million of revenue in 2012. AutoCanada plans to sell $40 million of new shares at $25.00 each to help pay for this purchase. This will increase the number of shares outstanding by 8%. [ofie_ad]

AutoCanada’s acquisitions help boost revenue and earnings

Thanks to recent acquisitions and rising automobile demand, AutoCanada’s revenue rose 14.4% in the three months ended March 31, 2013, to $284.3 million from $248.5 million a year earlier. Earnings jumped 65.1%, to $2.3 million, or $0.35 a share, from $1.4 million, or $0.21 a share. AutoCanada ended the quarter with long-term debt of $40.3 million, or a low 7.2% of its market cap. The company also held cash of $42.0 million, or $2.12 a share. The stock has soared 85% since the start of 2013, but it still trades at a reasonable 16.0 times this year’s forecast earnings of $1.75 a share. The shares yield 2.7%. In the Inner Circle Q&A, Pat looks at the outlook for car sales in a competitive and cyclical industry and whether the shares of AutoCanada can keep rising. He also examines the added risk of the company’s growth-by-acquisition strategy, particularly as it is now targeting bigger dealerships. He concludes with his clear buy-hold-sell advice on the stock. (Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.) COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members Much has been made of the struggles of the auto industry in North America in recent years. Yet sales of motor vehicles remain strong. Do you see any fundamental change in the nature of the automobile and our car-driving habits in the foreseeable future, or do you think the auto industry will look pretty much the same in a few decades? Let us know what you think.

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