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Stock to Watch: AutoCanada roars to record high - and the ride isn’t over

Pat Priestner, CEO of AutoCanada Inc., the first publicly traded company allowed to buy a stake in a General Motors dealership in Canada. May 2, 2012, in Edmonton.

Ian Jackson/The Globe and Mail/Ian Jackson/The Globe and Mail

AutoCanada Inc.

Last close: $19.22 a share

52-week trading range: $9.85 to $19.37 a share

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Annual dividend: 72 cents a share for a yield of 3.8 per cent

Analysts' ratings: There were 5 buys, 1 hold and no sells, according to Bloomberg data. Target prices ranged from $20 a share as estimated by GMP analyst Otto Cheung to $23.50 a share by Cormark Securities analyst Maggie Johnson.

Recent history: Shares of Canada's only publicly traded auto dealership have soared nearly 95 per cent (including dividends) over the past year amid a recovery in North American vehicle sales. AutoCanada's stock hit a record high on Thursday as analysts bumped up target prices after the company released strong fourth-quarter results this week. Same store sales rose 7.4 per cent, while revenue from existing and new dealerships grew nearly 10 per cent from a year earlier. The company, formerly structured as an income trust, raised its quarterly dividend last month by 5.8 per cent to 18 cents a share. AutoCanada operates 28 dealerships, mainly in western Canada under the Chrysler brand. However, it has been able to purchase General Motors and Kia dealerships since last year. On Thursday, the company said it had bought a smaller Audi and Volkswagen dealership group in Winnipeg. Audi is the first luxury brand it has acquired.

Manager insight: AutoCanada was a compelling play a year ago to play the auto sector recovery because its stock was cheap versus its U.S. peers and had a fat yield, but the big driver now is its prospects to grow the company, says Terry Thib, a portfolio manager at Hesperian Capital Management Ltd.

"With the acquisition opportunities out there in the near term, I think there is room for even better growth than we have been seeing," said Mr. Thib, who starting buying its shares last June in the mid $11-range for his Norrep Entrepreneurs fund. "I don't think the story is over...They have been able to fund their acquisitions with their balance sheet and free cash-flow generation, as well as, pay out a healthy dividend."

AutoCanada company has in the past said it could do one or two acquisitions a year as dealerships come up for sale by retiring owners, but its chief executive officer Pat Priestner said this week that AutoCanada could do three to five this year, said Mr. Thib. "That is a material change from a few months ago in terms of growth outlook."

The company has already bought three smaller dealers this year, so they could potentially do six to seven in total in 2013 that would add to earnings per share, he said. "It is seeing a lot of new opportunities with the new brands [GM, Kia and now Audi]." He also expects AutoCanada to be able to add to earnings from cutting costs because it is buying 11 buildings that house its dealerships instead of renting them, and from new vehicle inventory financing rates at lower rates.

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AutoCanada shares still trade at a slight discount to its U.S. peers at 13 times forecast 2013 earnings versus 14.2 times, he said. "But AutoCanada has a better balance sheet than its peers and a much better yield. I think their growth potential is also much better, just being smaller and playing in the Canadian market where there are decent growth opportunities in terms of acquisitions. The number one risk is another severe slowdown or recession, but I think the probability is low."

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