AutoCanada Inc. (TSX: ACQ) is a leading North American multi-location automobile dealership group which offers new and used vehicles, spare parts, maintenance services, and customer financing. Most of the revenue is generated in the new-vehicles sales segment.

Key highlights 

• Acquires First Stellantis Dealership in the U.S.: Crystal Lake Chrysler Jeep Dodge Ram, Inc ("Crystal Lake"), a Stellantis dealership in Crystal Lake, Illinois, was recently acquired by the firm. This is the company’s first Stellantis dealership in the United States, which would expand its presence in the Chicago metropolitan market and is expected to generate approximately CAD 72 million in annualized revenue.
  

• Strong financial performance in Q2 2021: In Q3 2021, the company set a new high with sales of CAD 1,206.8 million, up from CAD 1017.1 million in the previous corresponding period. In Canada and the United States, the corporation continued to grow successfully in all areas of the business. The used automobile and financing and insurance ("F&I") businesses performed admirably, resulting in a strong show. Adjusted EBITDA in the reported period stood at CAD 68.3 million, up from CAD 61.1 million in Q3 2020, and net income was CAD 38.8 million, up from a loss of CAD 36.0 million respectively.
  

• Higher same store retail units: The company outperformed the Canada market by 1.5 ppts. Same store new retail units decreased by 16.2% as compared to the market decrease of 17.7%, while the same store used retail units increased by 2,032 retail units to 10,026, an increase of 25.4% as compared to prior year. The Company's continual optimization of its whole business model is demonstrated by the 18.6% rise in gross profit across all business areas, which grew by CAD 28.2 million to CAD 179.8 million on YoY basis.
  

• Deleveraging balance sheet: The Company had a net indebtedness leverage ratio of 0.2x at the end of the quarter, which was below the target leverage ratio of 2.5x to 3.0x. The key drivers leading to the improvement over the preceding quarter were strong operational performance in Q3 2021 and sustained effective working capital management.

 Source: Company 

Financial overview of Q3 2021 (In CAD)

 Source: Company 

• In the reported period the company clocked revenue increase by 19% to CAD 1,206.8 million, as compared to CAD 1,017.1 million in the prior year. This is the highest third quarter revenue reported in the Company's history.
• Total gross profit increased by 22.7% to CAD 220.2 million compared to CAD 179.4 million, propelled by the Company's continued focus on the used vehicle market and strong F&I outperformance.
• Although the company reported higher operating expenses, still due to higher sales it managed to report operating profit of CAD 62.8 million compared to CAD 56.9 million in pcp.
• Net income in the reported period stood at CAD 38.8 million against CAD 36.0 million in pcp.
  

Risks associated with investment

The worldwide car manufacturing supply chain may be disrupted, resulting in limited inventory access. Furthermore, overall economic situations may have an impact, resulting in lower demand for vehicle purchases and service. 

Stock recommendation

The company delivered another record-setting performance in Q3 2021, continuing the trend of sustainable improvement and execution of its complete business model and strategic initiatives. Furthermore, the company is continuously making great progress on almost every key measure, particularly driven by strong performance in the used vehicle, F&I and U.S. operations, along with an overall improvement in market outlook and demand. Moreover, in line with continued population growth, there is an anticipated continued long-term growth in year-over-year vehicle sales, which would help the company in growing its business and clock more free cash flows. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 32.99 on November 24, 2021. We have considered Arko Corp., Vroom Inc, OneWater Marine Inc. as the peer group for the comparison.

Technical Analysis Summary

One-Year Technical Price Chart (as on November 24, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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