By Jeff Sanford
Toronto, Ontario — November 7, 2016 — Tuesday Ticker is where we update you on the activities and financial news from the stocks in the CRM Index, a group of thirteen publicly-traded stocks related to the collision repair sector, and other news from across the sector. Make sure to check back every week for the latest financial news and reports to help guide your decision making.
– North American stock markets got off to a huge start Monday morning. US markets had fallen for more than a week previous. The losing streak was the longest in at least a decade. Market traders seemed to be worried that the Trump campaign was gaining ground, but news that the FBI found no evidence to warrant any charges against Hillary Clinton in the latest batch of leaked emails heartened market traders. In Toronto the S&P/TSX composite index was up 114.74 points in two hours of pre-market trading just before the bell Monday Morning. The Dow Jones industrial average was up an impressive 304.79 points. Markets seem to be predicting a Clinton win Tuesday night.
– Canada’s largest publicly-traded dealership group, AutoCanada, announced its Q3 numbers last Thursday. According to management adjusted (non-GAAP) earnings per share came in at $0.38.
The company reported in a press release that, “…economic headwinds impacted results,” but that, “…we continue to run profitable dealerships in all of our markets.” The company warned that Q4 is likely to continue to be “challenging from an automotive industry standpoint.”
Overall AutoCanada announced that Q3 Canadian new vehicle sales declined by 1.7 percent. This was no surprise, and simply reflects trends at the OEMs after record sales in 2015. What stands out in the AutoCanada release is the notion that, “The economic cycle presently in Alberta, and other resource based economies, have pressured the Canadian automotive industry as a whole.”
According to management, new vehicle unit sales in Canada year-to-date (Q1-Q3) have increased by 3.2 percent year-over-year, within these numbers there have been large declines in the west. In Alberta new vehicles sales are down 8.5 percent on the year, while in Saskatchewan, sales are down by 6.6 percent for the nine month period ended September 30, 2016.
Looking at the west on a quarterly basis, the story in Q3 was even worse. In Alberta car sales were down 12.5 percent, and down 10.5 percent in Saskatchewan.
According to the press release, “We have a high concentration of dealerships in Alberta and Saskatchewan, representing 49 percent of total revenue and 52 percent of total gross profit.”
Overall AutoCanada experienced a decline of 3.6 percent in revenue to $753.2 million, and gross profit decline of 4.5 percent to $122.9 million as compared to the same period in the prior year.
“It was a challenging quarter for AutoCanada and the automotive industry. However, we are continuing to focus on operational strategy and cost control in order to improve our business,” said CEO Steven Landry in the press release. “We will continue to pursue our growth strategy to diversify across Canada, through acquisitions of flagship stores in major markets, while paying particular attention to opportunities which are financially accretive and strategically important.”
During the quarter, six stores moved from the “newly acquired stores” category and into the “same store” designation. Over the next quarter, 11 additional stores will move into the “same store” category. Operating profits fell 4.5 percent to C$122.9 million. Total revenue fell 3.6 percent to C$753.2 million.
– Boyd Group reports its Q3 numbers this Thursday, so make sure to watch for a full report next week. The company is enjoying current interest from investors. A report in the financial trade press this week suggests that, assuming Boyd Group Income Fund continues to grow at current rates, a discounted cash flow analysis shows that the net present value of the stock is undervalued by 24 percent.
– Stock in Quebec-based Uni-Select continues to perform well. The stock has risen 7.27 percent since March of 2016. That’s a sizable rise in that short a time. A report in the financial press this week notes UNS has outperformed the the S&P 500 by 6.18 percent so far this year. Looking at the stock chart, shares in Uni-Select have been on a tear over the last year and a half. It was only January of 2015 that shares in Uni-Select were trading below $16. The stock began skyrocketing after that, hitting a price per share of $32 through September and October of this year. Since reporting Q3 numbers last week, the share price has come back a bit. Over the last few days traders seem to have taken some profits off the table. But for shareholders who have been along for the ride longer-term, $30.00 still represents a strong, rough doubling in price over just a little more than a year and a half. Impressive performance by any measure.
– An interesting report appeared this week on Genuine Parts Company (GPC). GPC, of course, is the parent company of parts distributor NAPA. The roots of the company go back to 1928 when there were just six employees. Today, GPC has 39,000 employees and annual sales of $15 billion. The company has also been a solid investment. This week’s report notes that the dividend (profits paid to shareholders) on the company’s stock is one of the most consistent and stable of all stocks.
According to the report, GPC has been raising its dividend, or the amount of earnings it pays out to shareholders, for 60 years now. This is one of the “longest active streaks of any business” listed on the New York Stock Exchange. In just the past 10 years the company has grown earnings per share by 5.3 percent compounded annually, which is very solid performance.
Growth tempered a bit last year and sales dipped slightly from 2014, but “most of the decline was due to currency fluctuations,” according to the report. The company should continue to do well. The report goes on to note that the “most important competitive advantage for Genuine Parts is its massive distribution network,” which consists of over 2,650 operations located throughout the US, Canada, Mexico, the Caribbean, Australia, New Zealand, China, and other emerging global markets. This distribution network provides the ability to quickly supply retailers and small stores with needed parts and supplies.
Anyone else trying to enter this industry and compete would find it a “highly capital intensive” pursuit to try and catch up to the economies of scale the company now enjoys. “The other main competitive advantage for the company is its trusted brand names, particularly NAPA.
In the years ahead, the analyst expects earnings per share to grow 3 to 5 percent from core revenue growth, 1 to 2 percent revenue growth from acquisitions and 1 percent through share repurchases. Share repurchases are when the company buys up its own stock to reduce share count, which increases earnings per share. As a result, “earnings per share growth could be reasonably expected to reach 5 to 8 percent per year. In addition to the stock’s 2.9 percent dividend yield, total return potential could exceed 10 percent annualized … It is a long-term hold for investors looking for exposure to the automotive industry.”
Related Market Notes
– The Big Three automakers, General Motors, Fiat Chrysler and Ford, have all reported their Q3 earnings. The general outlook for this group seems to be that, while the record sales of 2015 won’t be repeated in 2016, the broad American economy is growing, “slowly, but steadily.”
Nearly 200,000 jobs have been created each month in the US since early 2010, suggesting there are buyers for new cars. With the average vehicle on our roads still more than 11 years old, it seems likely that large swathes of the fleet will need to be replaced before too long.
The US Federal Reserve is also expected to keep interest rates low. Expectations are that, even if there is a rate increase, it’s only going to be a quarter point by year’s end, and that’s going to keep the cost of borrowing for a car low.
– Stock market watchers also warn this week about making any rash decisions based on volatility after election night. Don’t forget that markets plunged 5 percent after Obama’s election in 2008. And in 2012, Election Day was followed by a two-day drop of 3.6 percent. Since then however markets have been strong during Obama’s term, rising generally. So whatever the result Tuesday night, take it with a grain of salt. A trader quoted in a Bloomberg report put it this way, “Trying to trade that is very difficult … Even if the market sells off, if you have any reasonable time horizon, that should be a buying opportunity. The dust will settle and people will conclude the economy is OK.”
