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On today’s Breakouts report, there are 34 stocks on the positive breakouts list (stocks with positive price momentum), and 48 stocks are on the negative breakouts list (stocks with negative price momentum).

Featured today is a stock that is on the negative breakouts list – AutoCanada Inc. (ACQ-T). Year-to-date, the share price has rallied a remarkable 86 per cent. However, over the past four weeks, the share price has plunged 25 per cent, making it the worst performing stock in the S&P/TSX Small Cap Consumer Discretionary Sector Index.

The negative price momentum remains intact, which could take the share price down to around the $40 level in the near-term. For long-term investors, this may be a stock to patiently watch as it continues to slide.

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A brief outline on AutoCanada is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Edmonton-based AutoCanada operates 49 franchised vehicle dealerships across 8 Canadian provinces, and 17 franchises in the U.S. state of Illinois. The brands sold at the dealerships range from standard to luxury brands, including Chrysler, Dodge, Jeep, Volkswagen, Kia, Chevrolet, Ram, FIAT, GMC, Nissan, Subaru, Audi, BMW, Ford, Mazda, Porsche, and Mercedes-Benz.

The company’s reporting segments are new vehicles (representing 42 per cent of total revenue in the second quarter), used vehicles (43 per cent), parts, service and collision repair (10 per cent), and finance, insurance and other (6 per cent).

In terms of the company’s geographical revenue breakdown, in the second quarter 85 per cent of revenue stemmed from Canada with the balance from the United States.

On Sept. 13, the company announced the acquisition of Autolux MB Collision, a Mercedes-Benz collision centre located in Montreal.

Investment thesis

  • Strong fundamentals. High consumer demand for cars.
  • Robust revenue and earnings growth reported.
  • Healthy balance sheet. As at June 30, the net debt leverage ratio stood at just 0.1 times, providing amble financial flexibility for the company to fund future acquisitions.
  • Solid pipeline of potential acquisition targets. Fragmented dealer market. Executive chair Paul Antony stated on the second quarter earnings call, “We’ve established a significant transaction pipeline with dealerships and collision centers representing over $500 million in annual revenue currently being evaluated under signed LOIs [letter of intent] and purchase agreements. The LOIs, subject to due diligence, represent $200 million in annual revenue. Signed purchase agreements for dealerships located in Ontario, subject to OEM [original equipment manufacturer] approval and other standard closing conditions represent over $300 million in annual revenue, inclusive of brands we do not currently operate today. We expect to close on these deals before the end of this year.”
  • Reasonable valuation.
  • Potential reinstatement of its dividend.
  • Key potential risks to consider include: 1) decelerating earnings growth as we may be at or near peak earnings; 2) risk of multiple compression; 3) investors may continue to take profits off the table and rotate into other stocks with higher earnings growth forecast for 2022; and 4) supply constraints (i.e. lack of vehicles available to sell). On the earnings call, management indicated that they had 65 days of supply at the beginning of August based on selling a minimum of 60 used vehicles per month per dealership. Executive chair Paul Antony also highlighted on the call that the majority of vehicle supply, 78 per cent of the used vehicles sold, are from lease returns and trade-ins enabling the company to meet consumer demand (lower exposure to public and secondary auctions where vehicle prices have spiked).

Quarterly earnings reported

After the market closed on Aug. 11, the company reported its second-quarter financial results that exceeded the Street’s expectations.

Revenue was $1.3-billion, up from $727-million reported during the same period last year. Driving the robust revenue growth was used vehicle sales, and F&I (finance and insurance) as over 80 per cent of vehicles sold are financed. The number of total vehicles sold jumped 59 per cent year-over-year to 23,953. Sales of used vehicles jumped 84 per cent year-over-year to 6,043. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) stood at $70.5-million, compared to $4.8-million reported during the same period last year, and ahead of the consensus estimate of $53.5-million. Earnings per share came in at $1.23, beating the Street’s forecast of 78 cents. Two days later, the share price was up 8 per cent and closed at its highest level in 2021 (at $58.89).

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Dividend policy

In April 2020, management announced the suspension of its dividend due to uncertainties arising from the coronavirus. In the news release, management stated, “The company intends to reinstate a dividend in the future when a greater degree of visibility and normalcy returns.”

Prior to this announcement, the company paid its shareholders a quarterly dividend of 10 cents per share.

Analysts’ recommendations

This small-cap consumer discretionary stock with a market capitalization of approximately $1.2-billion is covered by nine analysts. The stock has seven buy recommendations, one ‘neutral’ recommendation (from the analyst at CIBC), and one ‘underweight’ recommendation (from the analyst at ISS-EVA).

The firms providing research coverage on the company are: Acumen Capital, ATB Capital Markets, Canaccord Genuity, CIBC World Markets, Cormark Securities, ISS-EVA, National Bank Financial, Scotia Capital and Stifel Canada.

Financial forecasts

According to Bloomberg, the consensus EBITDA estimate is $219-million in 2021, and is forecast to rise 7 per cent to $234-million in 2022. The consensus earnings per share estimate is $3.74 in 2021 with earnings per share forecast to increase 12 per cent to $4.18 in 2022.

Earnings expectations have been rising. For instance, three months ago, the consensus EBITDA estimates were $186-million for 2021 and $202-million for 2022. The consensus earnings per share estimates for 2021 and 2022 were $2.89 and $3.36, respectively.

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Valuation

Analysts commonly value the stock on an enterprise value-to-EBITDA basis, and to a lesser degree on a price-to-earnings multiple basis.

According to Bloomberg, the stock is trading at a price-to-earnings multiple of 10.5 times the 2022 consensus estimate, slightly above the five-year historical average multiple of 9.7 times but well below its peak multiple of nearly 18 times during this time period.

The average 12-month target price is $64.13, implying the share price is has 46 per cent upside potential. Individual target prices provided by eight analysts are as follows in numerical order: $54, $55, $64, two at $65, $67, $68, and $75 (from ATB’s Chris Murray).

Insider transaction activity

Year-to-date, there has not been any trading activity in the public market reported by insiders.

Chart watch

Year-to-date, the share price has rallied 86 per cent. However, in recent weeks, the stock has been under pressure. Over the past four weeks, the share price has dropped 25 per cent. As a result, the stock is approaching oversold territory. The relative strength index (RSI) is 33. Generally, an RSI reading at or below 30 reflects an oversold condition.

In terms of key resistance and support levels, the share price has initial overhead resistance around $50, close to its 50-day moving average (at $48.87). After that, there is major resistance around $60. Looking at the downside, the share price is nearing technical support around $40, just above its 200-day moving average (at $38.36).

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POSITIVE BREAKOUTSSept. 10 close
RZZ-XAbitibi Royalties Inc. $26.15
ARE-TAecon Group Inc $21.88
CLIQ-TAlcanna Inc. $7.31
ANRG-TAnaergia Inc. $25.71
AND-TAndlauer Healthcare Group Inc. $48.37
ATZ-TAritzia Inc. $41.72
BIP-UN-TBrookfield Infrastructure Partners LP $73.48
CCO-TCameco Corp $30.99
CSU-TConstellation Software Inc $2,220.31
DML-TDenison Mines Corp $1.99
DSG-TDescartes Systems Group Inc $107.99
DRM-TDREAM Unlimited Corp $27.12
EFR-TEnergy Fuels Inc $8.83
GFL-TGFL Environmental Inc. $47.09
GSY-Tgoeasy Ltd $213.78
GC-TGreat Canadian Gaming Corp $44.92
JWEL-TJamieson Wellness Inc. $37.19
KEL-TKelt Exploration Ltd $3.72
LSPD-TLightspeed POS Inc. $157.59
LAC-TLithium Americas Corp $28.53
MOZ-TMarathon Gold Corporation $3.43
ML-XMillennial Lithium Corp. $3.93
NXE-TNexGen Energy Ltd. $7.40
RBA-TRitchie Bros Auctioneers Inc $82.31
SEC-TSenvest Capital Inc. $401.95
ZZZ-TSleep Country Canada $35.07
TECK-B-TTeck Resources Ltd $32.03
TOI-XTopicus.com Inc. $132.00
TXP-TTouchstone Exploration Inc. $1.61
TOU-TTourmaline Oil Corp $38.38
UEX-TUEX Corp $0.50
URE-TUr-Energy Inc $2.10
WCN-TWaste Connections Inc. $167.44
ZEN-XZen Graphene Solutions Ltd. $4.02
NEGATIVE BREAKOUTS
AEM-TAgnico Eagle Mines Ltd $69.95
AP-UN-TAllied Properties REIT $41.61
ARR-TAltius Renewable Royalties Corp. $8.07
AHC-TApollo HealthCare Corp. $2.14
ACO-X-TAtco Ltd $40.96
ACQ-TAutoCanada Inc $44.03
AYR-A-CNAYR Strategies Inc. $27.18
BTO-TB2Gold Corp $4.65
CNC-XCanada Nickel Co. $2.75
WEED-TCanopy Growth Corp. $19.12
CWEB-TCharlotte's Web Holdings Inc. $2.80
CSH-UN-TChartwell Retirement Residences $12.69
CUF-UN-TCominar Real Estate Investment Trust $10.32
CL-CNCresco Labs Inc. $10.38
CRON-TCronos Group Inc. $7.78
CURA-CNCuraleaf Holdings Inc. $14.00
DSV-XDiscovery Silver Corp. $1.54
DOL-TDollarama Inc $55.41
DII-B-TDorel Industries Inc $11.66
EGLX-TEnthusiast Gaming Holdings Inc. $5.07
FN-TFirst National Financial Corp $44.65
GTII-CNGreen Thumb Industries Inc. $32.07
GTMS-TGreenbrook TMS Inc. $12.78
HARV-CNHarvest Health & Recreation Inc. $3.59
HEXO-THEXO Corp. $2.73
IMG-TIAMGOLD Corp $2.75
IMCC-CNIM Cannabis Corp. $4.20
IVQ-U-TInvesque Inc. $1.93
KNT-TK92 Mining Inc. $6.85
KRR-TKarora Resources Inc. $3.07
K-TKinross Gold Corp $7.23
LB-TLaurentian Bank of Canada $40.52
MPC-TMadison Pacific Properties Inc. $6.00
MTA-XMetalla Royalty & Streaming Limited $8.77
MMED-NEOMind Medicine Inc. $3.22
MI-UN-TMinto Apartment REIT $22.84
MOGO-TMogo Inc. $5.94
TPX-B-TMolson Coors Canada Inc. $57.81
PLTH-CNPlanet 13 Holdings Inc. $6.02
PGM-XPure Gold Mining Inc. $0.98
RIV-CNRIV Capital Inc. $1.39
RCI-B-TRogers Communications Inc $60.60
SIA-TSienna Senior Living Inc $15.31
SMT-TSierra Metals Inc $2.62
LEV-TThe Lion Electric Company $13.80
TRZ-TTransat AT Inc $4.74
VFF-TVillage Farms International $10.83
WPRT-TWestport Fuel Systems Inc. $4.41

Source: Bloomberg and The Globe and Mail

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.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

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