Strong fundamental to pull back the stock: Canadian Tire Corporation’s business spans across retail, financial services, and REIT. The company, through its retail division, sells a wide range of products, including automotive, leisure, sports, hardware, and home products.

The rapid increase of COVID-19 cases has taken a toll on the financial markets across the world. However, with the drastic slide in equities, it’s prudent to buy fundamentally strong stocks. The investment idea is simple here. Most of these stocks have corrected significantly, thanks to the broader market sell-off and are available at a bargain price. Moreover, the chances of a sharp bounce-back are higher in the case of fundamentally strong companies.

One such stock on our radar is of Canadian Tire Corporation (TSX: CTC.A). Shares of Canadian Tire Corporation have taken a fair amount of beating the recent past. Though the company remains fundamentally strong, negative market sentiments weighed on it. Also, near-term challenges related to store-closures following coronavirus outbreak further dragged its stock down. 

Canadian Tire Corporation has corrected by more than 38% year-to-date (as of March 27) and is a real steal deal. Barring near-term challenges (which we believe are transitory and are likely to dissipate in the coming months), the company’s business remains strong, offers a lucrative dividend yield of 5.3%, and is trading at an attractive valuation multiple.  

Strong financial performance: Canadian Tire Corporation impresses with its exceptional financial performance, thanks to the continued momentum in its namesake banner. The company’s comparable sales (key performance metric) increased by 3.9% in the fourth quarter, reflecting higher traffic both in-store and online. Meanwhile, comparable sales rose 3.6% in 2019, reflecting acceleration in the growth rate and came ahead of management’s expectation of a 3.0% increase. Consolidated revenues increased 4.5% year-over-year to CAD 4.32 billion in the fourth quarter, reflecting higher shipments at Canadian Tire coupled with strength across its entire retail banners. Also, the addition of Party City further supported the top-line growth.

Financial Highlights (Source: Company Reports)

Canadian Tire's gross margin expanded 50 basis points to 34.8% in the fourth quarter, reflecting improvement in the retail segment and higher revenues from its Financial Services segment. Adjusted or normalized EBITDA jumped about 26% to CAD 739.9 million in the fourth quarter, thanks to the higher revenues. The company’s bottom line marked double-digit growth in the fourth quarter, led by higher revenues in both retail and financial segments. Moreover, focus on lowering expenses further cushioned the fourth-quarter bottom line. Adjusted EPS increased by 15.7% year-over-year to CAD 5.53. 

Strong dividend profile: Canadian Tire Corporation has a strong history of rewarding shareholders with increased dividends. The company has consistently raised its annual dividend and targets a payout ratio of 30% to 40% of its adjusted earnings. Strong sales and operational efficiency help the company to generate stable cash flows and support dividend growth. Canadian Tire Corporation announced a dividend of CAD 1.1375 per share, to be payable on June 1, to the shareholders of record as of April 30. The declared dividend implies a growth of 9.6% year-over-year.

Valuation Methodology – Price to Earnings Multiple

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Shares of Canadian Tire Corporation have fallen nearly 45% from its 52-week high of CAD 157.36 and are quoting at CAD 86.11 with a market capitalization of CAD 5.62 billion. While challenges persist in the near-term, we remain upbeat on the stock as it could bounce back strongly once the market returns to normal. Canadian Tire’s retail segment’s revenues could continue to gain from its pricing strategy and targeted promotions. Further, the expansion of the e-commerce business should act as a catalyst. The company’s favorable product mix (including own brands) and inclusion of Party City are likely to drive revenues higher, in turn, its margins. Canadian Tire stock is trading at a forward P/E multiple of 6.5x and based on the above-mentioned facts, we expect the company’s P/E multiple to expand in the coming months. While valuing the stock using the relative valuation method, i.e., P/E based approach, we have taken a target P/E multiple of 8.0x and arrived at a target price with an upside of lower double-digit (in percentage terms). Hence, we have given a “Buy” recommendation on Canadian Tire stock on 27 March 2020 closing price of CAD 86.11. 

Canadian Tire Daily Price Chart (Source: Thomson Reuters)

Disclaimer

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