CANADIAN TIRE CORP. $45 (Toronto symbol CTC.A; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 81.5 million; Market cap: $3.7 billion; Price-to-sales ratio: 0.4; SI Rating: Above Average) operates 475 stores that sell automotive, household and sporting goods. It also operates 86 PartSource auto-parts stores, 372 Mark’s Work Wearhouse casual-clothing stores and 273 gas stations.
Canadian Tire continues to replace its older stores with new ones that are more shopper-friendly. The new stores have wider aisles, brighter lighting and clearer signage. On average, its stores are a third larger than they were five years ago.
These improvements contributed, at least in part, to a rise in Canadian Tire’s sales last year. Its sales rose 6%, to $9.1 billion from $8.6 billion the previous year. Same-store sales rose 0.3%. However, earnings fell 4.5%, to $572.5 million from $599.9 million. Per-share earnings fell 2.2%, to $4.85 from $4.96 on fewer shares outstanding. These figures exclude writedowns of hedging contracts and other items. The earnings drop was largely caused by higher administrative and advertising costs.
Canadian Tire gets just 9% of its revenue from its finance division, which runs its credit-card operations. But this division accounts for over a third of its earnings.
The recession forced Canadian Tire to write off 6.3% of its loans in 2008, up from 5.8% the previous year. Canadian Tire plans to reduce its write-offs this year by bringing in tighter lending policies and lowering some cardholders’ credit limits.
Besides credit cards, Canadian Tire’s finance division offers savings accounts and Guaranteed Investment Certificates. As investors looked for safety during the recent stock market drop, demand for these investments rose. Thanks partly to this, revenue at the finance division rose 10% in 2008. The extra cash from these investments should let Canadian Tire keep making new loans until the credit markets begin to stabilize and the company can sell more of its loans to third parties.
Canadian Tire’s 2009 earnings will probably fall to $4.07 a share, and the stock trades at 11.1 times that estimate. That’s cheap when you consider the high quality of its brands. The company’s $0.84 dividend yields 1.9%.
Canadian Tire is a buy.
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