On today’s Breakouts report, there are 42 stocks on the positive breakouts list (stocks with positive price momentum), and 87 stocks are on the negative breakouts list (stocks with negative price momentum).
Featured today is a consumer stock that appeared on the negative breakouts list on Monday. The share price has experience a double-digit drop, declining 12 per cent since the company released its second-quarter earnings results on Aug. 12. As a result, the stock is in oversold territory and is trading at an attractive valuation relative to its historical averages.
The stock discussed today is Canadian Tire Corp. Ltd. (CTC.A-T).
A brief outline on Canadian Tire is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based Canadian Tire has three distinct reporting segments. First, its retail segment consists of over 1,700 retail stores and gas stations across the country under banners including Canadian Tire, Mark’s, Sport Chek, Atmosphere, Hockey Experts, Sports Experts and Party City. 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. Second, Canadian Tire operates a Financial Services segment, which offers products such as credit cards and in-store warranties. Lastly, the CT REIT segment provides further diversification to the company’s revenues.
There is seasonality in the company’s operations with the first quarter typically generating the lowest earnings and the fourth quarter typically the strongest.
Investment thesis
- Leading Canadian retailer.
- Improving profitability. Reported earnings per share continue to improve: 2016: $9.22; 2017: $10.67; 2018: $11.95; 2019: $13.04; and 2020: $13.00.
- Stable and rising dividend. Historically, a dividend increase is announced in November.
- Nearing its seasonally strongest quarter – the fourth quarter.
- Attractive valuation.
- Potential risks to consider: 1) investors may purchase other stocks given the lack of year-over-year earnings growth that is forecast for Canadian Tire in the near-term; 2) supply chain challenges; 3) competitive pressures may increase this holiday season; 4) inflationary pressures (rising freight and commodity prices); and 5) potential weakness in consumer spending.
Quarterly earnings results
Before the market opened on Aug. 12, the company reported better-than-expected second-quarter financial results.
Normalized earnings per share came in at $3.72, well above the consensus earnings per share estimate of $2.85.
CTR same-store sales declined 2 per cent year-over-year but increased 18 per cent compared to the same period in 2019 (pre-pandemic comparison). Roughly 40 per cent of CTR stores are located in Ontario and 70 per cent of these stores were closed last quarter due to COVID lockdowns.
Mark’s same-store sales jumped 43 per cent year-over-year and increased 1 per cent compared to the same quarter in 2019. SportChek same-store sales climbed 29 per cent year-over-year and increased 5 per cent relative to 2019.
Retail return on invested capital (ROIC) was 14.1 per cent. The share price was relatively unchanged that day, rising 8 cents to close at $202.01.
On the earnings call, management elaborated on widespread supply chain challenges. President of Canadian Tire Retail TJ Flood said, “We know securing inventory will be an ongoing challenge. The global supply chain continues to be strained and things could be choppy in pockets. But we continue to work with our vendor partners every day to explore innovative ways to navigate the supply chain. As an example, the team was able to charter three vessels transporting about 2,000 containers each, and the entire vessel is dedicated only to CTR product, and this is the first time we’ve ever chartered our own boats. So we’re up against some tougher comps in the back half of this year, but we want to put ourselves in the position to fulfill as much consumer demand as we can, and that’s exactly what we’re doing.”
While management anticipates freight and commodity prices will persist through the first half of 2022, Mr. Flood noted that the company has “very strong long-term relationships with our vendor base, and even though the ocean freight spot market is setting record highs, we’ve been able to protect a large percentage of our container volume at contracted rates, something many of our smaller competitors aren’t able to do.”
The company will be releasing its third-quarter financial results before the market opens on Nov. 11. The current consensus earnings per share estimate is $4.26.
President and chief executive officer Greg Hicks indicated on the second-quarter earnings call that retail sales so far in the third-quarter are “holding” relative to the very strong sales reported during same period last year – a potentially positive sign for the third-quarter earnings results.
Dividend policy
Management is committed to returning capital to its shareholders.
Looking back over the past decade, management has announced a dividend increase in November every single year.
Last November, the company announced a 3-per-cent dividend hike, raising its quarterly dividend to $1.175 per share from $1.1375 per share. This equates to a current annualized dividend yield of 2.7 per cent.
Analysts’ recommendations
This consumer stock is covered by 13 analysts. Eight have buy recommendations, four have neutral recommendations, and one (Kathleen Wong at Veritas) has a “sell” recommendation.
The firms providing research coverage on the company are: ARC Independent Research, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, Eight Capital, ISS-EVA, Morningstar, National Bank Financial, RBC Dominion Securities, Scotia Capital, TD Securities and Veritas Investment Research.
Revised recommendations
Since the company released its second-quarter financial results, seven analysts revised their expectations - six analysts lifting their target prices and one analyst lowering his target price.
- BMO’s Peter Sklar to $216 from $223.
- Eight Capital’s Graeme Kreindler to $215 from $210.
- Morningstar’s Zain Akbari to $190 from $178.
- National Bank’s Vishal Shreedhar to $226 from $219.
- Scotiabank’s Patricia Baker raised her target price to $250 from $242.
- Veritas’ Kathleen Wong to $185 (the low on the Street) from $180.
- RBC’s Irene Nattel to $251 (the high on the Street) from $232.
Financial forecasts
The Street is forecasting earnings per share of $16.63 in 2021, up from $13.00 reported in 2020. Expectations are for relatively flat earnings growth the following year. The consensus earnings per share estimate is $16.62 in 2022.
Earnings forecasts have been rising. For instance, three months ago, the consensus earnings per share estimates were $15.99 for 2021 and $16.29 for 2022.
Valuation
On a price-to-earnings basis, the stock is trading at a price-to-earnings multiple (P/E) of 10.6 times the 2022 consensus estimate, which is below the five-year historical average P/E multiple of 11.7 times, and below the 10-year historical average P/E multiple of 12.2 times.
Analysts typically value the stock and derive a target price using a sum-of-the-parts calculation in order to account for the three distinct business segments.
The average 12-month target price is $223.83, implying the share price has 26 per cent upside potential over the next year.
Individual target prices provided by 12 analysts are: $185 (from Kathleen Wong at Veritas who has a ‘sell’ recommendation), $190, $215, $216, $220, $225, $226, two at $234, $240, $250, and $251 (from RBC’s Irene Nattel).
Insider transaction activity
Recent trading activity by C-suite executive and board members has been light.
On Sept. 30 and Oct. 1, director Michael Owens invested over $60,000 in shares of Canadian Tire. He bought a total of 340 shares at an average cost per share of approximately $177.33 for an account in which he has indirect ownership (J. Michael Owens Professional Corporation), after which this particular account held 1,540 shares. Prior to that on June 18, Mr. Owens invested over $108,000 in Canadian Tire shares, acquiring 550 shares at an average price per share of roughly $196.97 for this account.
On June 29, director Diana Chant purchased 250 shares at a price per share of $195.922, increasing this specific account’s position to 2,470 shares. The cost of this investment exceeded $48,000.
Chart watch
Since the company reported its quarterly earnings results on Aug. 12, the share price has dropped 12 per cent. However, there does not appear to be panic selling as the daily trading volume has not increased.
The price weakness may be a result of profit-taking and rotation into other securities or cash given the tough year-over-year earnings comparisons expected in future quarters (lacking strong year-over-year earnings growth). On Aug. 12, the share price closed at $202.01, just 5 per cent below its record closing high of $212.84 reached on May 13.
Year-to-date, the share price is only up 6 per cent.
The stock is technically oversold. The stock has a relative strength index (RSI) reading of 24. Generally, an RSI reading at or below 30 reflects an oversold condition. Consequently, the share price may soon stabilize and be due for an oversold bounce.
Looking at key technical resistance and support levels, the share price faces a major ceiling of resistance around $200. On further price weakness, the next major support level is around $160.
Please note that this report is not an investment recommendation. The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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Jennifer Dowty