The financial website Boomer & Echo wrote about the state of Canadian automotive retail over the weekend, and if the latest figures are any indication, business is booming.
Robb Engen, the “Echo” in Boomer & Echo, reported that Canadians bought 1.95 million new vehicles in 2016—a fourth consecutive year of record results. However, Engen is not amused. He believes, rightfully so, that new car purchases can ruin a family’s finances; he used his own personal situation as a prime example.
By avoiding new cars for the next five years, Engen estimates that he can save $50,000— money that can be put into his and his wife’s TFSAs and put to work tax-free over the next +30 years. At a modest post-inflation return of 3% (3% inflation), in 2047, Engen and his family will have over $121,000 to use tax-free right around the time he and his wife might be looking to retire.
So, rather than play the “game” the auto industry wants you to play, why not benefit from their success? There are plenty of auto-related investments worth considering, including General Motors Company (NYSE: GM).
Here are three I believe you should consider before any others.
Cars have to be fixed
Not only does an investment in Canadian Tire Corporation Limited (TSX: CTC.A) give you ownership in one of Canada’s biggest retailers, but it also operates a huge automotive service and parts business through its dealer network across the country, which includes close to 5,600 service bays, a whole section of every Canadian Tire store dedicated to do-it-yourselfers, and almost 100 PartsSource stores.
In 2015, the Canadian Tire retail business, which includes PartsSource, generated $8.1 billion in revenue from five different business categories which include automotive. If I had to hazard a guess, I’d say the automotive business accounted for at least 25% or $2 billion.
It’s an important part of Canadian Tire, and something the company continues to try to improve.
You have to insure your car
According to the Insurance Bureau of Canada, there are something like 207 private, property, and casualty firms writing policies for homes, vehicles, and businesses. In 2015, the company with the highest market share in terms of direct written premiums was Intact Financial Corporation (TSX: IFC) at 15.6%; the next closest competitor was Aviva Canada, owned by a U.K. firm. The next biggest publicly traded TSX company was Toronto-Dominion Bank (TSX: TD)(NYSE: TD) at 6%.
While it’s tempting to go with TD Bank because it’s one of the Big Five, Intact has a great business, one that Fool.ca contributor Nelson Smith recommended in late December, calling it a stock you can buy and hold forever.
His rationale is two-fold: it knows how to make money on its underwriting, which Warren Buffett will tell you is the key to a successful insurance operation, and it holds a vice-like grip on the Canadian property and casualty market.
Plus, it has a reasonable 2.4% dividend yield.
Automobile parts vital to car sales
Wickham Investment Counsel portfolio manager Sean Pugliese was recently a guest contributor to the Globe and Mail. In the article, he did a “Dogs of the TSX” stock screen, looking for those poor performers in 2016 that should rise to the occasion in the coming months of 2017.
To make the cut, a company had to have had a negative total return in 2016 of 5% or greater. It also had to have a market cap of $1 billion or more and a debt-to-equity ratio of less than 100%.
Pugliese was especially interested in two of the 19 companies that made the screen; one of which was Guelph-based auto parts maker Linamar Corporation (TSX: LNR), a company that I believe has impressive management and solid free cash flow.
Despite the potential headwinds Linamar faces thanks to Donald Trump, I, too, see the company’s stock rebounding in 2017.
