AutoCanada Inc. hasn’t generated a profit for six consecutive quarters but investors are sensing that the Edmonton-based car dealership’s worst days are behind it: The shares have surged more than 40 per cent over the past month.
Is it worth jumping onto this rally?
The stock has been on a five-year losing streak that has tested long-term investors. Part of the problem is that AutoCanada was focused on Western Canada, where Alberta was home to 22 of its 48 car dealerships and drove 49 per cent of the company’s annual sales in 2014.
This focus didn’t work out too well when the price of oil collapsed, Alberta’s economy tanked and the demand for new Infinitis, Volkswagens, Nissans and Hyundais dried up.
Later, the company’s bid for geographic diversification misfired: It paid $110-million to acquire Chicago-based Grossinger Auto Group in March, 2018. But AutoCanada then took a $44-million writedown on the deal and executives confessed that Grossinger’s retail outlets weren’t quite up to snuff.
Investors couldn’t count on AutoCanada’s management team to lift the company out of the mess that they had, in part, created: Both the chief executive and chief financial officer resigned a little over a year ago. Meanwhile, the retail automotive sector was struggling in 2018 amid rising borrowing costs that were crimping car sales.
The stock, which hit a high of $90.45 in 2014, touched a low of $7.49 last month. Each nascent rally over the past couple of years has been followed by a lower low, no doubt demoralizing many investors. The current rally, though, looks different – largely because the company is different.
Previously, the company focused on new car sales and would often auction used cars at a loss. Service bays at dealerships languished with occupancy rates of 50 per cent or 60 per cent.
Now, AutoCanada is ramping up its interest in used car sales, which increased 18.1 per cent in the third quarter. As a result, the ratio of used to new car sales increased to 72 per cent from 67 per cent previously. It’s also doing more repairs on the new cars it sells.
The benefits: Service bays are busier and repairs offer a more predictable revenue stream.
“It’s not a really complicated business. It’s been a business that was focused for far too long on just selling new cars instead of all the profit centres within the business,” Paul Antony, AutoCanada’s relatively new executive chairman (he stepped into the role 16 months ago), said in an interview.
AutoCanada’s third quarter results, released last week, suggested that the company is making progress.
Revenue in the quarter increased to $981.9-million, up 13.3 per cent over the third quarter of 2018. Same store sales, or revenue generated by dealerships open for at least a year, increased 9.1 per cent.
Although the company generated a loss of $4.1-million or 15 cents a share, you could see the makings of a turnaround here: EBITDA (earnings before interest, taxes, depreciation and amortization) was $21.8-million, up 34.9 per cent year-over-year – after making adjustments for accounting changes and costs associated with shutting down two U.S.-based franchises.
“While results were in-line, we believe the positive progression being shown quarter-over-quarter is resonating positively with investors,” Chris Murray, an analyst at AltaCorp Capital, said in a note.
"[W]e believe sentiment has reached an inflection point and expect further price appreciation as valuations normalize and short-sellers exit their positions,” he added.
Mr. Murray now expects that the shares could trade as high as $20 within a year, which is up from his previous price target of $17. That makes him the most bullish analyst covering the stock. But with the share price on the rise, you have to wonder if opinions on AutoCanada are set to change.
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David Berman