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The Globe and Mail

AutoCanada shares rally still has traction

AutoCanada’s growth is fuelled by accretive acquisitions; it now has 32 dealerships in six provinces.

J.P. MOCZULSKI/The Globe and Mail

For investors in AutoCanada Inc., the easy money has been made. But there is more to this company than easy money.

Investors that were either lucky enough or shrewd enough to bet on the auto dealership group were rewarded handsomely last year by one of the hottest streaks on the TSX.

AutoCanada's share price tripled in 2013, as a few different tailwinds combined into a favourable squall.

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"It's certainly not cheap, and there's a lot of growth built into the stock," said Bruce Campbell, a portfolio manager at StoneCastle Investment Management. "But I think there's certainly more upside." The surefire catalyst that has propelled the stock so much already: acquisitions.

AutoCanada purchases privately held auto dealerships, mostly in Western Canada, reinvigorates the businesses, beefs up marketing and generally manages to wring substantial value from them.

"It looks like they're in some cases getting a [profit] bump of about 50 per cent over a three-year time frame," Mr. Campbell said.

The business of selling cars is changing. The traditional family-owned, private dealership is giving way to consolidation by companies such as AutoCanada. Many dealer-owners are considering retirement and are putting their franchises on the market.

"The pipeline is huge," said Terry Thib, a portfolio manager at Hesperian Capital Management. "And I think we're in the nascent stages of this."

That demographic trend is one factor driving growth for AutoCanada. Another is the auto industry's recovery. Yet another is the expanding economy of Western Canada.

It has all amounted to a stock streak fuelled by accretive acquisitions. The company now has 32 dealerships in six provinces. Based on company guidance, some analysts are expecting an average of one acquisition per quarter over the next year or so. That much is priced into the stock, Mr. Thib said. The stock, according to Bloomberg, currently trades at about 18 times 2014 estimated earnings – not exactly a bargain.

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But estimates on both earnings and the number of acquisitions could prove conservative.

The list of available dealerships is expected to grow considerably over the next couple of years, Mr. Thib said. "The size of the dealerships that are up for sale also seems to be growing."

And the next phase of growth in the industry could be partially sustained by the purchase of multiple franchises at once.

"There's probably going to be more focus and more opportunity to acquire small to medium-sized dealer groups," said Otto Cheung, an analyst at GMP Securities who has a target price of $50 on AutoCanada's stock. It doesn't take much more time to acquire three or four dealerships at once than it does for one-off transactions, he said.

The only major growth inhibitor in AutoCanada's way is the rule maintained by some auto manufacturers that their Canadian franchises may not be publicly listed corporations. Most car companies have abandoned this restriction, but Ford, Honda and Toyota are the biggest holdouts.

"What they really need is to be able to tap into Ford," Mr. Campbell said. "They've probably picked off a lot of the low hanging fruit. And there's going to be more competition for the dealerships they're looking at now."

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At some point, Ford is likely to yield. The same rule does not apply in the United States, where giant dealership owners such as AutoNation and Penske Automotive Group have consolidated franchises of all the major auto makers.

Plus Ford is facing pressure from both AutoCanada and Canadian dealer owners themselves, who want to have AutoCanada as a potential suitor when they decide to sell, Mr. Thib said. "It's well known in the industry that they're big and they're looking. And they have the cash."

Even without Ford and the others, AutoCanada has plenty of room to exceed what are decidedly high expectations. For prospective investors, the stock has pulled back this year, opening up an opportunity to buy on the dip.

The company's shares declined by almost 20 per cent in January in the absence of any substantial negative company-specific news. Mr. Thib said weak auto sales hit U.S. dealers and that AutoCanada may have been pinched by the same selloff.

AutoCanada's stock has since recovered about 40 per cent of its lost value, but investors who believe in the company's growth outlook may want to bet on more gains ahead.

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