Pat Priestner is the CEO of AutoCanada Income Fund, the only publicly traded dealership group stock in Canada.Ian Jackson/The Globe and Mail
From hyped to jilted and back again, AutoCanada Inc.'s stock now occupies unfamiliar territory: reasonably priced.
The auto dealership group's valuation arguably got a little bloated, but a 50-per-cent selloff appears to have taken care of that.
With no real change in the company's fundamentals, the excessive slide created a chance to buy a high-growth stock on sale, said Bruce Campbell, president and portfolio manager at StoneCastle Investment Management, which owns AutoCanada shares.
"It's trading at what I would consider to be a reasonable P/E ratio even if their growth rate slows," he said. "If they're able to keep putting up the numbers they have, it seems cheap."
AutoCanada is in the business of buying up privately held auto dealerships, and improving profitability through finding efficiencies and expanding marketing.
The company has benefited from an abundance of high-quality dealerships available to be picked off. The dealer base in Canada is aging, and many owners are looking to sell their businesses and retire.
AutoCanada has combined growth through acquisitions with organic growth – actual vehicle sales at its growing roster of dealerships, driven by the recovery of the North American auto industry from the recession.
As the only publicly traded dealership group in Canada, this consolidation model went over very well with investors. Its shares tripled in 2013. They doubled again in the first half of this year, peaking at $91.72 in June.
At that point, however, speculation on U.S. competitors considering entry into the Canadian market started to spook investors, Mr. Campbell said. "You're looking at a stock that's trading at 30 times earnings, then people realize this isn't a monopoly, and it's not going to continue forever."
The broad equity selloff that began in September made things worse for AutoCanada's shareholders. Collectively punished over economic concerns and the implications for auto sales, AutoCanada was also singled out as a high-growth stock with a rich valuation and punished accordingly.
By mid-October, the company's stock fell by nearly 50 per cent, dipping to $48.36. "We always overshoot on the downside," said James Telfser, a partner and portfolio manager at Aventine Management Group.
And AutoCanada's downside was much steeper than its U.S. peers, practically wiping out the Canadian company's valuation premium, despite having almost three times the growth rate, RBC Dominion Securities analyst Steve Arthur said in a recent note. "We see no real change to the business outlook or growth prospects, organic or acquisitions," he said.
Since bottoming out, the stock has rallied by 30 per cent, but is still more than 30 per cent off its peak. Mr. Arthur rates AutoCanada an "outperform" and sees its stock rising to $84 within the next year. The five other analysts covering the stock also have the equivalent of buy recommendations, at an average target price of $92, which represents at 47-per-cent premium over Friday's closing price of $62.60. It trades currently at about 17 times estimated 2015 earnings.
The industry, while consolidating, remains highly fragmented, with 2,100 owners for nearly 3,500 dealerships in Canada – plenty of opportunities for AutoCanada to add to its 46 dealers, Mr. Arthur said.
Plus, Canadian auto sales are at record levels, with gradual growth expected over the next several years, which should help sustain AutoCanada's organic growth, he said.
Mr. Telfser, however, sees vulnerability in the company's geographic concentration, with a big majority of the company's dealerships based in Western Canada.
While location has traditionally been a source of strength for AutoCanada as beneficiaries of the oil economy, the recent dropoff in energy prices could weaken the company's sales.
"I think there could be a slowdown there as far as truck sales go," Mr. Telfser said, adding that uncertainty in energy markets could hold down AutoCanada's valuation.
"I don't know if it gets back up to $90 any time soon, unless they start making more acquisitions outside of Western Canada."
Tim Shufelt