Acquisitions Drive This Small Cap to New Highs

AutoCanada Inc. (TSX:ACQ) just acquired a group of dealerships in the U.S. Here’s why that’s a big deal.

In certain industries, economies of scale are critical.

Nowhere is this truer than in the automotive industry. It’s no longer possible to own one car dealership. You’ve got to own a bunch of them to make the numbers truly sing.

Down in the U.S., we’ve seen the consolidation of dealerships into several publicly traded auto groups — the biggest being AutoNation, Inc. for new cars and CarMax, Inc. for used cars — but up here in Canada, things haven’t moved nearly as quickly.

That’s why the news that AutoCanada Inc. (TSX: ACQ) is buying the Chicago-based Grossinger Auto Group for $110 million is so exciting.

Not only is this the company’s first foray into the U.S., but it provides the company with a platform for expansion outside Canada, where it owns 54 dealerships in eight provinces.

“This is a pivotal move for AutoCanada as this U.S. acquisition broadens our geographical reach and brand diversification through adding a combination of domestic, import and luxury dealerships to our portfolio,” said Steven Landry, president & CEO. “This is exactly the kind of acquisition that will be instrumental to accelerating our growth.”

The 14 dealerships AutoCanada is acquiring are some of the oldest in the U.S. Founded in 1928, it’s grown to represent 12 different car brands, generating $523 million in annual revenue, putting it at the 95th spot on the Automotive News’s Top 150 Dealership Groups.

That’s a 17% bump to AutoCanada’s annual revenue and will add $0.15, a 7% increase, to the company’s 2019 earnings.

An interesting dynamic

Although AutoCanada is intent on continuing its expansion across Canada, the current North American marketplace dictated it pivot into the U.S., where dealerships are selling for less than they have in the past. Meanwhile, up here in Canada, the competition to buy dealerships is significant. There are definitely more buyers than sellers.

AutoCanada’s CEO believes it can make another five or six acquisitions in 2018 given its finances are better than they’ve been in a long time.

One thing that sticks out for me in AutoCanada’s Q4 2017 report is its adjusted free cash flow of $91 million for all of 2017 — 32% better than a year earlier and the highest it’s ever been.

Based on a current market cap of $617 million, long-term debt of $332 million, and $95 million in cash, AutoCanada currently has a free cash flow yield of 10.7%; generally, value investors consider anything above 8% to be a good deal.

Bottom line on AutoCanada stock

Canaccord Genuity Group Inc. analyst Derek Dley is so impressed by the U.S. acquisition that he raised the company’s 2018 and 2019 earnings by $0.06 and $0.15, respectively, to $2.02 and $2.25, while raising its target price by $2 to $27, 15% higher than where it’s currently trading.

Frankly, AutoCanada is one small-cap stock you can’t ignore.

Fool contributor Will Ashworth has no position in any stocks mentioned.

More on Investing

man shops at grocery store
Dividend Stocks

Choice Properties Pays Monthly: Does the Yield Compensate for Higher Rates?

Choice’s yield deserves a closer look at cash after property spending and financing costs.

Read more »

Natural gas
Energy Stocks

A Perfect TFSA Stock: A 6.5% Payout Each Month

Peyto Exploration and Development is growing its dividend as natural gas fundamentals continue to improve.

Read more »

senior man and woman stretch their legs on yoga mats outside
Dividend Stocks

Best Monthly Dividend Stocks on the TSX? My Top Picks for Today

Looking for monthly dividend income and an attractive growth profile? These two TSX stocks are my top picks today.

Read more »

A meter measures energy use.
Energy Stocks

Canadian Utilities vs. Hydro One: Which Dividend Stock Would I Hold for 15 Years?

A proposed merger changes the Canadian Utilities comparison, while Hydro One still requires price discipline.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Thursday, November 12

Rising natural gas prices could help TSX energy stocks extend their gains today, while falling oil, gold, and silver prices…

Read more »

pig shows concept of sustainable investing
Stocks for Beginners

How I’d Turn Quarterly Bank Dividends Into a Monthly Paycheque

Quarterly bank dividends can fund regular monthly transfers without choosing stocks for payment dates.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Energy Stocks

Retirees: How to Use Your TFSA to Earn an Average of $386 in Monthly Tax-Free Income

This TFSA strategy can help boost average returns while reducing risk.

Read more »

oil pumps at sunset
Dividend Stocks

Canadian Natural Resources vs. Suncor: The Dividend Stock to Own Through 2026

Let’s compare Canadian Natural Resources and Suncor Energy across their financial performance, dividend track records, growth prospects, and valuations to…

Read more »