Hot Stock: Canadian Tire

Retailer rolls on post-Target.

This week is the week Canadian shoppers have been waiting for and the week Canadian retailers have been bracing against: Target has rode into town. Only three locations have so far opened, but the rest will be welcoming consumers by the end of the month. Needless to say, investors who hold Canadian-based retail stocks are a bit jittery—if Target takes away too many consumer dollars, then our homegrown operations could suffer.

One company some people are worried about is Canadian Tire (TSX: CTC.A). The venerable store’s stock price has been up and down over the last couple of years — though mostly up over the past 12 months — and it’s trading at 13 times earnings, which is below where it’s traded at in the past. The lower price-to-earnings ratio is due, in large part, to Target’s arrival, but analysts at Desjardins Capital Markets thinks the apprehension is overblown. “Our view is that the market overestimates the impact of Target’s entry on Canadian Tire,” wrote analyst Keith Howlett in a report.

Michael Schaab, a portfolio manager with Leith Wheeler Investment Counsel, thinks that while Target’s arrival may cause earnings to grow at a slower  pace than they once did, its strong association with outdoor and auto goods will keep consumers coming into stores.

The company has also taken steps to diversify its offerings, most notably its purchase of sporting goods company Forzani Group in 2011. In Q4 it increased same store sales by 2.9% at FGL Sports (Forzani) and 3.5% at Mark’s Work Wearhouse—now rebranded as Mark’s, the clothing retailer it purchased in 2001, even though Canadian Tire store sales were down 1.1%. Howlett does point out those declining Canadian Tire store sales are a risk, but hopefully revenues at its other brands — and its money making financial services division — will keep company profits rising for the time being.

One thing investors can look forward too is share buybacks. Canadian Tire has said that it expects to repurchase about $100 million of shares over the next year. The company said they’ll repurchase no more than 2.5 million shares, or approx 3.4% of outstanding shares. Howlett also points out that the company has increased its dividend in recent years, usually when it announces its third quarter results. Its yield is currently 1.72%

Despite Target’s arrival, most analysts are bullish on the stock with 71% saying it’s a buy and just 29% suggesting investors hold. This should be a slow and steady grower, though Schaab does think shareholders could see a 9% annualized total returns over the next three years.

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