A Member of Pat McKeough’s Inner Circle asked him recently about a Canadian stock that sells a variety of well-known vehicles through a wide network of dealerships across the country. AutoCanada continues to grow by acquiring new dealerships. This year it has added two dealerships in Guelph, Ontario and a Mercedes-Benz franchise in Montreal.
Pat notes that the company’s shares are well down from their 2014 high. The company’s growth-by-acquisition strategy helps keep its new car sales rising in a competitive and cyclical industry. But that growth strategy adds risk, adds Pat, particularly as AutoCanada targets larger dealerships.
Q: Hi Pat, what are your thoughts on AutoCanada at the current price?
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A: AUTOCANADA INC. (symbol ACQ on Toronto; www.autocan.ca) has 57 franchised car dealerships in eight provinces.
The company sells 22 makes of vehicles, including Chrysler, Dodge, Jeep, Ram, Fiat, Chevrolet, GMC, Buick, Cadillac, Nissan, Hyundai, Subaru, Audi, Volkswagen, Mercedes-Benz and BMW. However, Chrysler cars and trucks (including Dodge, Jeep, Ram, Alfa Romeo and Fiat) supply around 41% of its revenue.
The company continues to fuel its growth by acquiring more dealerships.
In May 2017, it paid $16.1 million for Mercedes-Benz Rive-Sud in Montreal.
Other recent purchases include two Guelph, Ontario, dealerships: Guelph Hyundai, purchased for $14.1 million in December 2016, and Wellington Motors, purchased for $30.7 million in October 2016. Wellington sells Chrysler, Dodge, Jeep, and Ram vehicles.
AutoCanada’s revenue rose 6.3% in the three months ended June 30, 2017, to $894.9 million from $842.3 million a year earlier.
Growth stocks: Lower oil and gas prices contribute to drop in share price
The total number of new-vehicle sales for AutoCanada in the quarter was up 11% to 13,429. Revenue from those transactions (62% of the total) was $558.7 million, up 12.4%. The total number of used-vehicle sales fell 5.0%, to 5,061 (contributing 20% of revenue). Parts, service and collision repair generated $114.0 million in revenue (13%) for the quarter, up 13.6%. Finance and insurance contributed $39.3 million of the overall revenue (5%). That’s up 6.6%.
Mostly due to higher costs, earnings rose only slightly in the quarter, to $15.55 million, or $0.57 a share, from $15.52 million, or $0.57. Those numbers exclude one-time items.
AutoCanada shares rose as high as $91.72 in June 2014, but the company has since dropped to its current price near $23. That’s mostly because lower oil and gas prices have prompted producers to delay projects and cut jobs. That has hurt car sales in Western Canada, which supplies over 72% of AutoCanada’s revenue.
The stock trades at 14.5 times the company’s forecast 2017 earnings of $1.60 a share. It yields 1.7%.
AutoCanada’s growth-by-acquisition strategy adds risk, particularly because it’s now targeting bigger dealerships. However, its new car sales continue to rise. That’s despite the industry’s highly competitive and cyclical nature.
Inner Circle recommendation: AutoCanada is okay to hold, but only for highly aggressive investors.
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