Pat McKeough responds to many requests from members of his Inner Circle on specific stock picks as well as questions on investment strategy and the economy. 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 us about a stock that has risen and fallen sharply in the past year. AutoCanada has almost four dozen franchised auto dealerships across Canada and continues to add more through takeovers. While the company has benefited from a rebound in car sales, it also faces several challenges in a cyclical, competitive business. Pat examines the risk of its growth-by-acquisition strategy and the potential impact of lower oil prices on Western Canadian car sales.
Q: Pat: I am a new member and I have a question. What is your current view of AutoCanada? Thanks.
A: AutoCanada Inc. (symbol ACQ on Toronto; www.autocan.ca) has 46 franchised car dealerships in eight provinces.
The company sells numerous brands, including Chrysler, Dodge, Jeep, Ram, Fiat, Chevrolet, GMC, Buick, Cadillac, Nissan, Hyundai, Subaru, Audi, Volkswagen and BMW. However, Chrysler vehicles (including Dodge, Jeep, Ram and Fiat) supply around 70% of its revenue.
In 2013, AutoCanada’s dealerships sold roughly 36,000 vehicles and processed about 364,000 repair and maintenance orders in their 381 service bays.
The company continues to fuel its growth by acquiring more dealerships.
In June 2014, it paid $91.4 million for the Hyatt Automotive Group, which has six dealerships and the exclusive right to build and operate another, under the Nissan banner, on a property in southeast Calgary.
The Hyatt dealerships are known by their trade names: Hyatt Mitsubishi, Fish Creek Nissan, Calgary Hyundai, Northland Volkswagen, Hyatt Infiniti and Crowfoot Hyundai. In 2013, they collectively sold 3,991 new vehicles and 2,317 used ones.
Other recent purchases include 80% of Bridges Chevrolet Buick GMC in North Battleford, Saskatchewan, for an undisclosed amount; Tower Chrysler Plymouth in Calgary for $20.4 million; 75% of Lakewood Chevrolet in Edmonton for $19.8 million; Toronto Dodge Chrysler for $2.2 million; and 85% of two BMW dealerships in Laval, Quebec, for an undisclosed sum.
Revenue and earnings jump in latest quarter
Thanks to its recent acquisitions and rising car demand, AutoCanada’s revenue jumped 82.0% in the three months ended September 30, 2014, to $733.4 million from $402.8 million a year earlier.
Earnings gained 62.0%, to $17.8 million from $11.0 million. The company sold shares to help pay for its recent acquisitions. As a result, per-share earnings rose at a slower rate of 45.1%, to $0.74 from $0.51.
AutoCanada ended the quarter with long-term debt of $179.4 million, or a moderate 20% of its market cap. It also held cash of $64.6 million, or $2.64 a share.
The company recently raised its quarterly dividend by 4.2%, to $0.25 a share from $0.24. The new annual rate of $1.00 yields 2.6%.
The stock rose has high as $91.72 in June 2014, but it has since dropped 57.3% to its current price, $39. That’s partly because lower oil prices could prompt producers to delay projects and cut jobs. That would hurt car sales in Western Canada, which supplies over 80% of AutoCanada’s revenue.
The stock trades at 11.5 times the company’s forecast 2015 earnings of $3.32 a share.
The company’s growth-by-acquisition strategy adds risk, particularly because it is now targeting bigger dealerships. However, car sales should remain strong, although the industry remains highly competitive and cyclical.
We view AutoCanada as a hold, but for highly aggressive investors only.