Shares of AutoCanada Inc. (ACQ-T) are trading at their highest level in six years amid investor optimism that the auto dealership group is well-positioned to take advantage of an anticipated post-pandemic economic rebound.
The Edmonton-based company — which operates 66 franchised dealerships, including 27 brands in eight Canadian provinces and south of the border in Illinois — is expected to report a “blowout” first quarter in the coming weeks based on preliminary numbers, analysts say, while continuing to make acquisitions to boost its market share.
AutoCanada’s stock, trading at around $43.35 midday Wednesday, has risen by about 85 per cent so far this year and has surged more than 750 per cent from the $5 range it fell to just over a year ago; its lowest point in a decade after being crushed by the initial economic fallout from the COVID-19 pandemic.
The company responded at the time with a restructuring plan it said would “mitigate losses and protect cash and liquidity.” Sales have since roared back and the company reported record quarterly results exceeding $1-billion in the third quarter last year, up 3.6 per cent year-over-year, and its highest-ever fourth quarter revenue of $876.1-million, up 8.3 per cent from the year before.
“Dramatic events and challenges presented by the pandemic allowed us to accelerate our restructuring to a level that could not be achieved in a normal operating environment,” AutoCanada president Michael Rawluk told investors after the fourth-quarter earnings were released in March. “It also transformed our culture into one built on performance, trust and most importantly, grit. Nothing makes a culture stronger and more whole than adversity like steel tempered in fire.”
Last week, the company announced an upsized offering of senior notes to $125-million from $100-million and released preliminary first-quarter results showing revenue is expected to come in between
$960-million to $980-million, an increase of about 36 per cent versus a year earlier. Before the preliminary results were announced, analysts had been expecting revenue of about $800-million. The company is expected to release official first-quarter results in early May.
AutoCanada also said it expects same-store new retail unit sales growth of approximately 30 per cent in the first quarter, versus the Canadian market increase of 15 per cent for the brands it sells, citing data from DesRosiers Automotive Consultants.
In an email to the Globe, Cormark Securities analyst David Ocampo described the expected first-quarter results as a “blowout” and described the same-store growth as “an impressive feat, especially considering the well-documented inventory shortage that’s plaguing the industry.”
Mr. Ocampo has a “buy” rating on the stock and increased his target price by $8 to $51.50 after the preliminary results were announced last week.
“While this is a sizable target price increase, we believe there is further upside to our target,” he wrote in an April 15 note, citing the company’s many acquisition opportunities. He said the company has about $250-million of “dry powder” to put towards deals.
Canaccord Genuity analyst Luke Hannan said in a recent note that the potential acquisitions include franchise dealerships with new brands it doesn’t have, such as Honda and Toyota, most of which are in Ontario. He said the acquisitions could also include companies that fit with its newly established used digital retail division and collision centres, “which provide a more ratable, higher-margin source of revenues to the company.”
And while the first-quarter performance data wasn’t unexpected given the impact of COVID-19 on the spring selling season last year, “the magnitude of the growth comes as a welcome surprise,” Mr. Hannan said in his April 14 note.
“Combined with (1) top-tier operational metrics, including nine straight quarters of outperformance in Canada and a healthier mix of used cars sold vs. new cars sold; (2) strong discipline over the company’s balance sheet; and (3) a robust acquisition pipeline that is likely to grow, we remain of the view that AutoCanada is exceptionally well positioned for a banner 2021.”
CIBC World Markets analyst Krista Friesen increased her target to $41 from $37 last week, saying in an April 14 note that the first-quarter preliminary results are driven by “strong execution,” adding that the rise in same-store used vehicle growth is “impressive, made even more so given the tight inventory levels the industry is experiencing.”
Ms. Friesen, who has a “neutral” rating on the stock (similar to hold) added: “We also suspect that there is some residual pent-up demand caused by the pandemic.”
She noted key risks for the company include “another major pandemic wave, a slowdown in industry sales, a decline in consumer health in general, an increase in interest rates or impairment in the ability for consumers to obtain loans, pressure from company debt levels, and economic conditions in its largest province of Alberta.”
Stifel GMP analyst Maggie MacDougall increased her target on the stock to $55 from $48 after the preliminary first-quarter results were announced and kept her “buy” rating.
“We have increased our forecast to reflect pre-released [first quarter], our expectations for strong demand, rising vehicle prices and robust profitability this year,” she wrote in an April 14 note. “We do not model unannounced M&A, however, believe acquisition announcements are imminent.”
Stifel highlighted the company as a top pick for the second quarter and said it “remains a favourite idea.”
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