Canadian Tire Corporation Limited

Canadian Tire Corporation Limited (TSX: CTC.A) is a Canadian company with a portfolio of businesses, which include Retail division, CT REIT and a Financial services segment. It was founded in 1992, and currently, it has more than 1,740 outlets.

Q2FY20 Financial Highlights: CTC.A announced its quarterly results, wherein the Company posted revenue of CAD 3,161.8 as compared to CAD 3,686.6 million in the previous corresponding period (pcp). The decline was primarily attributed to temporary store closures across all banners which was partially offset by higher shipments at Canadian Tire and the inclusion of Party City. The business witnessed a dip in the Financial Services segment due to lower card sales revenue and lower credit charges. The Company reported a gross margin at CAD 940.7 million, reflecting a decline of 17.8% on y-o-y basis, due to lower revenue, partially offset by a lower cost of producing revenue. Income before income taxes stood at CAD 8.3 million, significantly lower than CAD 261.3 million in pcp, due to a lower gross margin, inclusion of other expense against other income, a slightly lower selling, general and administrative expenses and a higher net finance costs. Net income plunged to CAD 2.3 million, as compared to CAD 203.8 million in pcp. The Company reported cash and cash equivalent of CAD 1,991.8 million, while total assets stood at CAD 20,051 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: A second wave of the novel virus might result in store closure, which would affect the group’s performance. Further, within the Financial Services segment, a higher credit loss might weigh on the gross margin of the Company.

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of CTC.A soared ~25% in the last three months due to increasing traction within the retail segment as the business moving towards normalcy. The Company is focusing on improving its operational efficiency and targeting ~CAD200 million in annualized savings by 2022, a key positive for the margin. The Company reported a 1.7% improvement within the retail sales, amidst a store closure during the period, which is impressive. The retail sales growth was supported by exponential growth through the eCommerce channel. The group mentioned that at the end of the second quarter, substantially all of the Company’s 1,445 stores in Canada were open for business. After reopening the stores, the group is recording higher traction and improvement in sales, which is encouraging. The group was focusing on eCommerce channel and continued to accelerate its digital and eCommerce efforts across all banners during the quarter. We believe, the Company would be benefitted with higher traction in-store and robust growth from the e-commerce segment, which would result in improved sales volume in the coming days. We have valued the stock using the P/E based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like Dollarama Inc, Metro Inc, Loblaw Companies Ltd etc. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 129.22 on August 12, 2020.

CTC.A Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Saputo Inc.

Saputo Inc. (TSX: SAP) is engaged in the processing and production of dairy and cheese products and has operations across Canada, the U.S., Argentina, the United Kingdom, and Australia. The company ranks among the top cheese producers in the U.S. and Canada and derives the majority of the revenue from these Geographies. The company's brands include Saputo, Armstrong, Frigo, and Stella.

Q1FY20 Financial Highlights: SAP impresses with its quarterly results and reported higher earnings, amidst a lower top-line. Revenues, during the quarter stood at CAD 3.391 billion, reflecting a slide of 7.6% on y-o-y basis. The performance of the company has been impacted by lower volumes from foodservice and industrial segments, while partially supported by improved retail numbers. Adjusted EBITDA improved to CAD 366.5 million, depicting a growth of 2.4% on y-o-y basis. Within the Canada region, the group witnessed growth in the fluid milk segment and reported a y-o-y growth in the sales volume while the U.S. region has reported a dip in sales volume which hindered the profitability, to an extent due to fixed costs associated to the business. However, the period was positively impacted by increased milk availability across Australia and through the acquisition of specialty cheese business of Lion Dairy & Drinks Pty Ltd. The company reported net earnings of CAD 141.9 million as compared to CAD 121.4 million in the previous corresponding quarter.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The second wave of coronavirus might disrupt the supply chain of the group and further dent the demand from the foodservice and industrial market segments.

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of SAP declined in the recent past due to a weak investor’s sentiment on account of COVID 19 pandemic. SAP corrected ~11% so far this year. As an essential service provider, the Company’s operations continued to be carried out in all regions in which it operates. The group has reported an improved bottom-line, amidst a drop in the sales volume from the U.S, which is commendable. The Company’s products witnessed an increase in the consumer’s demand in the recent past, and we expect the trend to continue in the foreseeable future. The performance of the business has seen improvement from the recent acquisition of Lion Dairy & Drinks Pty Ltd. Further, the Company’s European operations have been benefited from the surge in retail market segment sales volumes. The Company also announced a higher quarterly dividend (up ~2.7%) of CAD 0.17 per common share, payable on October 02, 2020. Increasing dividend at a time when most of the businesses are cutting the distribution shows the financial strength of the group. We have valued the stock using the Price to Earnings based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered industry (Food & Tobacco) average on NTM basis. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 35.62 on August 12, 2020.

SAP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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