In this week’s content analysis, we analyze Canadian Tire’s (CTC.A) Q2 results, which were updated at the end of last week in StockPointer (see attachment) Download .
Earnings came in 5% below analysts’ estimates, and sales were affected by Western Canada’s instability. Following the earnings release, Canadian Tire’s stock lost close to 3.8% in five days.
Despite a slightly weaker growth rate than initially predicted, caused by a fall in the price of oil, Canadian Tire has been able to improve its economic performance; it’s now generating even more wealth for their shareholders.
Over the course of the last 12 months, the company has augmented its invested capital by 4.58%, equivalent to an increase from $10.8B to $11.32B. During the same period, the net operating profit after tax (NOPAT) has increased by 8%. The investments undertaken have therefore improved the company’s economic profitability, which in turn exemplifies why the return on capital is now at 9.2%; the highest figure observed since 2011. In addition, management was able to reach one of their objectives by minimising the cost of capital, which decreased from 6.4% to 6.2%, and thus increasing the performance spread to 2.9%.
As a result of this net improvement in economic performance, the intrinsic value of CTC.A has jumped by 10.5% in 1 year, and by 2.4% in 3 months. Due to the recent decrease in the stock price, the P/VI ratio is attractive at 0.73. Based on August 17th closing price, the potential increase of the stock relative to the intrinsic value is around 37%. The graph portraying the future growth value (FGV) indicates that there is a slight discount (7%) with reference to the Current Operating Value (COV). This could be justified by the market pessimism about the prospects of the oil sector, of which Canadian Tire is partly exposed to.
Canadian Tire’s EVA has experienced a fairly stable increase. It is interesting to note that although the net operating profit (TTM EPS) is stable, or even slightly decreasing since September 2014, the EVA has continued to increase slowly but surely.
Ending with the accounting performance, so far this year the company has bought back $244.3M of shares; based on the engagement taken at the beginning of the year, $155,7M of shares will be bought back before the end of the exercise. For those who favor dividend growth, note that the average annual increase offered by CTC.A has been around 21.7% since 2011. Canadian Tire also generates a high amount of free cash flow, except for in 2014, where this was affected by a debt payment.
In conclusion, we think Canadian Tire’s performance is enviable, especially considering the hard times Western Canada is going through. If this economic situation were to last longer, CTC.A’s “Petroleum” segment, which represented around 17% of total revenues in 2014, would be the most affected. Given the high number of job cuts that have been taking place in the past months, work equipment sales, which bring the highest profit margins to Canadian Tire, could also be negatively affected. In spite of these risk factors, we still believe the company is financially healthy and that in the long run, it will keep its leader status within the sector.