Canadian Tire Corporation Limited

Canadian Tire Corporation Limited (TSX: CTC.A) sells home goods, sporting equipment, apparel, footwear, automotive parts and accessories, and vehicle fuel through a roughly 1,740-store network of company, dealer, and franchisee-operated locations across Canada. 

Why should Investor’s Book Profit?

• Higher Balance Sheet risk: Investors in CTC.A are exposed to higher balance sheet risk, as Debt/Equity ratio of the company stood at 1.46x in Q3FY21, higher than the industry median of 0.81x. Moreover, the company reported its net debt to EBITDA of 8.19x in Q3FY21, as compared to the industry median of 4.17x. A higher ratio suggests poor debt protection ability of the firm, which remains as a major reason for concern.

• Lengthy cash conversion period: During Q3FY21, the company reported its cash conversion period of 233.1 days, which is considerably higher than the industry median of 40.8 days. A higher cash conversion period suggests weak operational metrics, as the company is taking time to convert its stock to cash flows. The above is alarming for the company, and counternutation of the above trend might dampen the upcoming performances.

• Sluggish performance of retail segment: During Q3FY21, the company reported 6.2% y-o-y dip in retail revenue excluding Petroleum of CAD 3,103.6 million due to lower shipments to Dealers at Canadian Tire. Moreover, the company’s eCommerce sales were CAD 257.3 million, reflecting a slide of 2.2% on y-o-y basis. Moreover, the group is witnessing higher SG&A expenses which resulted to income before income taxes of CAD 245.4 million in Q3FY21, compared to CAD 333.8 million, a year ago. 
  

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

Long term debt to total capital stood relatively higher at 40.8% in Q3FY21, as compared to the industry median of 18%. A higher percentage depicts a poor capital management. The stock of CTC.A closed below its 100-days and 200-days simple moving averages, which indicates a bearish pattern. We have valued the stock using Price to Earnings-based relative valuation approach and arrived at a target price offering double-digit downside potential (in % terms). We have considered peers like Empire Company Ltd, Roots Corp etc. Hence considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock at the current market price of CAD 185.10 at 9:40 am Toronto time on January 19, 2022.

One-Year Technical Price Chart (as on January 19, 2022). Analysis by Kalkine Group

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

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