Auto Sales in Canada Fall Again: Avoid This Stock in 2019

AutoCanada Inc. (TSX:ACQ) saw operating expenses offset solid revenue growth in Q1 2019. Broader headwinds in the auto industry are a huge concern going forward.

| More on:
Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks

Image source: Getty Images.

New vehicle sales in Canada fell for the 14th consecutive month in April. Automakers and industry boosters were quick to blame the weather for the slow month, but the excuse may be wearing thin for onlookers. Consumer confidence waned in Canada last month, which has spilled over into several industries.

To start the year, I discussed why things looked dim for automobile dealers. Canadian consumers are already some of the most over-leveraged in the developed world. Deteriorating consumer confidence will only put more pressure on this industry, even if the rate environment improves.

AutoCanada (TSX:ACQ) operates car dealerships across Canada. It offers both new and used vehicles, as well as spare parts, customer financing, and maintenance services. Shares of AutoCanada had dropped 3.3% in 2019 as of close on May 8. The stock had plunged 36% from the prior year.

Last month I warned investors about AutoCanada’s prospects after auto sales reported a 13th consecutive retreat in March. AutoCanada had a strong finish to 2018, but broader headwinds have stoked negative sentiment. The company released its first-quarter results for fiscal 2019 on May 2.

Total revenue at AutoCanada climbed 19.2% year over year to $739.4 million. New vehicle retail sales jumped 20.1% year-over-year to 8,002. Revenue from the sale of new retail and fleet vehicles increased 18% to $399 million. Used retail vehicle sales surged 24.8% year over year to 5,650. Used vehicle sales accounted for just over a quarter of AutoCanada’s total revenue in Q1 2019. AutoCanada’s total parts, service, and collision repair and finance and insurance revenue also posted over 20% growth.

Unfortunately, AutoCanada’s aggressive Go Forward Plan has been costly. Even with the big jump in total revenue, the company posted a $4.1 million loss in the first quarter. Operating expenses surged 28.2% to $122.8 million, largely offsetting the gains it has made in its segments. The addition of US operations operating expenses resulted in a $21 million tab. Total operating expenses exceeded gross profit by $7.2 million.

AutoCanada’s forward-looking statement did not inspire confidence. The company projects that macroeconomic factors will continue to create uncertainty going forward. This includes a fear of future rate tightening. Central banks in the U.S. and Canada have pressed the pause button so far in 2019, but there is no guarantee that hikes will not recommence later this year or in 2020.

More concerning is the trajectory for the auto industry in North America. Sales of new vehicles are trending downwards, and AutoCanada expects a continued decline in volume for the rest of 2019. Slowing growth in Canada will add to these concerns. The economy shrank in the month of February, it appears Canada will struggle to meet a 1.5% growth target for the full year, which doesn’t bode well for automobile dealers who rely on consumer strength.

AutoCanada declared a quarterly dividend of $0.10 per share in the first quarter, which represents a 3.6% yield. The slump in its share price make it an unviable target for income investors.

There is too much working against AutoCanada to consider adding it this spring.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.

More on Investing

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Royalty: 3 Fabulous Stocks to Buy Now for Decades of Passive Income

Rogers Communications stock and Canadian Natural Resources stock could pay you dividends for decades to come.

Read more »

stock analysis
Investing

“GARP” Investing: 3 Can’t-Miss Stocks to Buy Now

goeasy (TSX:GSY) and other low-cost growth stocks could make your portfolio a market beater over the long run!

Read more »

calculate and analyze stock
Investing

My Take: The Best TSX Stock to Buy With $1,000 in March 2024

Here's why Restaurant Brands (TSX:QSR) remains a top TSX stock long-term investors should buy right now.

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in April 2024

For growth and dividends this April, look to these two REITs that have quite the promising present as well as…

Read more »

Woman has an idea
Tech Stocks

Prediction: 1 Stock That Could Trounce the Market 

The TSX has been favouring tech stocks, but not this one. However, it has the potential to trounce the market…

Read more »

Canadian Dollars
Stock Market

Where to Invest $5,000 in April 2024

Do you have some extra cash to spare? Here are five companies to invest $5,000 in next month.

Read more »

Plane on runway, aircraft
Stocks for Beginners

Up 53% From its 52-Week Low, Is Cargojet Stock Still a Buy?

Cargojet (TSX:CJT) stock is up a whopping 53%, nearing closer to 52-week highs from 52-week lows, so what's next for…

Read more »