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

horses compete to win race
Dividend Stocks

Telecoms Were Monday’s Worst TSX Sector: This One Yields 4.5%

Rogers offers a meaningful dividend yield, with debt reduction providing the clearest test of the investment case.

Read more »

ETFs can contain investments such as stocks
Investing

Why Many Beginner Investors Start With ETFs Instead of Stocks

Vanguard S&P 500 Index ETF (TSX:VFV) is a standout ETF to get started with.

Read more »

Blocks conceptualizing the Registered Retirement Savings Plan
Dividend Stocks

Which Account Should You Fill First for Retirement?

Not sure whether to fund your TFSA, RRSP or FHSA first? Here's a simple order for Canadians, plus how a…

Read more »

man in business suit pulls a piece out of wobbly wooden tower
Stocks for Beginners

The U.S. Just Cut Lumber Duties: This Producer Got the Lowest Rate

West Fraser's new announced duty rate offers relief, although separate tariffs and weak housing demand remain substantial hurdles.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Friday, October 23

Rising crude oil prices could support TSX energy stocks at the open today, but continued weakness in gold and silver,…

Read more »

A woman shops in a grocery store while pushing a stroller with a child
Dividend Stocks

An Ideal TFSA Stock for Retirees, Paying 5.2% Each Month

Here's why this popular Canadian real estate stock is one of the best picks for retirees inside their TFSAs.

Read more »

Hand Protecting Senior Couple
Dividend Stocks

A 4.8% Dividend Stock for Monthly Retirement Income

Sienna Senior Living pays $0.08 a share every month, about a 4.8% yield. See Q2 2026 growth, payout safety and…

Read more »

woman looks at iPhone
Dividend Stocks

Is Telus’s New Dividend Safe? What $10,000 Would Earn You Today

Here’s why Telus’s new dividend looks more sustainable and why the cut could make the stock a better long-term investment.

Read more »