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.

Why Should Investors Book Profit? 

• Increasing uncertainties: The resurgence of Delta variant cases has raised a lot of questions, and it might have an influence on the company's operations and cash flows as the government may tighten some mandatory lockdowns to combat the spread.

• Lower margin profile v/s Industry: In Q3 2021, the company failed on maintaining its pace and witnessed lower performance under operating margin matrix, consisting of gross margin, EBITDA margin, operating margin, and net margin, which exhibits the extreme pressure on the company.

Source: REFINITIV, Analysis by Kalkine Group

• Heavily leveraged: The company’s debt to equity ratio at the end of September 30, 2021, stood at 1.89x, which was higher than the industry median of 1.28x. Additionally, its Net Debt to EBITDA stood at 14.17x against the industry median of 1.44x. These factors imply higher balance sheet risks.
  

• Higher Cash Cycle days: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is enormously high at 56.9 days compared to an industry median of 41.7 days.
  

Valuations Methodology (Illustrative): EV to Sales

Stock recommendation

The company's topline grew at a robust rate, but its bottom line lacked the same vigor in the recent reported numbers for Q3 2021. Furthermore, the resurgence of the delta variety and omicron is wreaking havoc, and its liquidity ratios are lower than the industry median, as well as its cash cycle days are higher, indicating a negative liquidity profile. Even the greater debt profile implies that the balance sheet is under stress. Moreover, the lower margin profile vs. industry demonstrates the company's tremendous strain. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the current market price of CAD 42.18 at 10:15 am Toronto Time on December 30, 2021.

One-Year Technical Price Chart (as on December 30, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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