I recently received a request to do a stock analysis on Canadian Tire Corp. Ltd. With the retailer set to report second-quarter results later this week, let's take a look at the stock's prospects.
The company
Canadian Tire has nearly 1,700 retail stores and gas stations across the country under banners such as Canadian Tire, Mark's, Sport Chek and Sports Experts. Canadian Tire's retail segment offers investors a diversified platform with exposure to a variety of consumer markets such as automotive, home living, home repair, sporting goods and clothing. In addition to the retail segment, Canadian Tire operates a Financial Services segment, which offers products such as credit cards and in-store warranties. Canadian Tire also has a 83.6-per-cent interest in CT Real Estate Investment Trust, providing further diversification to the company's revenues.
Operationally, the company has delivered solid financial results. Management has targeted annualized sales growth of 3 per cent or more from Canadian Tire, 5 per cent or more from Mark's and 9 per cent or more from FGL Sports. First-quarter same-store-sales growth was strong across all of the company's core banners. At Canadian Tire stores, same-store sales growth was 4.7 per cent. FGL Sports same-store sales growth was an impressive 8.6 per cent, and Mark's same-store sales growth was solid at 5.5 per cent. The Financial Services segment reported a 22.6-per-cent year-over-year increase in income before taxes.
Productivity initiatives and cost controls are aimed at improving profitability. Last quarter, gross margins expanded to 35.1 per cent from 32.5 per cent in the prior year. Management has been improving its product offerings and effectiveness of its promotional activity.
The company's balance sheet is strong, allowing management to return capital to shareholders. The company has been steadily increasing its dividend and actively repurchasing its shares. The company pays shareholders a quarterly dividend of 52.5 cents per share, equating to a yield of 1.6 per cent.
Headwinds
The depreciating loonie and economic slowdown are challenges. The declining Canadian dollar is a headwind as it increases the costs for goods priced in U.S. dollars. Another area of caution is weakening economic conditions. In Alberta, declining oil prices are negatively affecting economic growth. Management has indicated that they are seeing sales momentum moderate in Alberta. Weakening economic conditions also have implications for the company's Financial Services segment as management plans to be more cautious, particularly with opening new accounts, and is anticipating slightly lower gross average accounts receivable growth.
Valuation
Looking at price to earnings based on the 2016 consensus estimates, the stock price is trading at a multiple of more than 15 times, above its three-year average of 12.9 times, approaching its peak multiple of just more than 16 times.
Chart watch
Year to date, the stock is up more than 7 per cent, ahead of the S&P/TSX composite index's negative return, but below the consumer discretionary sector return of approximately 9 per cent. Within the consumer discretionary sector of the S&P/TSX composite index, it ranks ninth out of 25 stocks in terms of year-to-date returns.
For the past five months, the stock price has been trending between $125 and $137, and is currently right in the middle of that range. The stock has technical support at $127. 50 – near its 200-day moving average – and $125. Upside resistance is between $132 and $133 – near its 50-day moving average – followed by $135 and $137.
Analysts' recommendations
There are 12 buy recommendations, three hold recommendations and one sell recommendation. Analysts determine one-year price targets primarily on a sum-of-the parts analysis.
They analyze the company's main components – retail, financial services and real estate – and then base their price targets by looking at the divisions in aggregate. The average one-year price target is $146.77, implying a potential return of roughly 12 per cent.
The consensus earnings per share estimate is $7.87 in 2015, growing 10 per cent to $8.63 in 2016. This is consistent with management's target for fiscal 2015 to 2017 of average earnings-per-share growth of 8 per cent to 10 per cent over this three-year period.
The company will be reporting second-quarter results on Thursday before the market opens. The consensus earnings-per-share estimate is $2.20. Last quarter, the company reported earnings of 88 cents, in-line with the consensus estimate, and the stock rallied just more than 1 per cent the day after the earnings release.
The bottom line
I believe the company will report solid financial results on Thursday. Weather has been favourable, and management continues to focus on productivity improvements.
Furthermore, the competitive landscape appears rational. The stock could rally on better-than-expected results.
If the stock does rally on a positive earnings surprise, I would recommend taking some profit off the table.
I would then look to potentially buy back shares at lower levels in the weeks ahead, as I believe markets may be vulnerable to a pullback if Chinese market and economic concerns resurface and if the U.S. Federal Reserve raises interest rates in September.