Car dealership operator AutoCanada’s (TSX:ACQ) stock price rallied 20.79% on Friday after the company released its third quarter earnings report after market on Thursday and investors were clearly impressed by many positive data points in the latest quarterly results installment.
The company looks like a promising recovery story after building on the momentum of a good second quarter to deliver yet another beautiful set of operating results as the company’s new Go-Forward strategic plan plays out.
Although shares are still trading much lower than their average trading ranges during the first half this year when a 52-week high above $13.30 a share was recorded, it’s possible that the share price has finally bottomed out with Friday’s massive jump.
Here’s what was great about the last quarter
AutoCanada delivered a surprise double-digit revenue growth during a period when its represented brands suffered an overall sales decline in the Canadian market.
Total third-quarter sales revenue grew by 13.3% year over year on top of a 7.4% similar increase during the second quarter of this year.
Same store sales for new vehicles in Canada impressively rose by 9.1% despite a 3% decline for the national market as reported in an industry survey. This builds on top of the growth registered in the second quarter.
An increasingly important growth driver, used vehicle sales, continues to power up top-line growth to drive same-store sales growth of new and used vehicles of 12.7% year over year for the third quarter.
Total vehicles sold increased by 2.8% from last year, while another 4.3% year-on-year growth was reported for the second quarter. There’s clearly some positive momentum there.
Adjusted EBITDA doubled as compared to the same quarter last year, significantly boosted by the new accounting rule IFRS 16, but the operating profitability measure was up “just” about 35% year-on-year. This growth trend has persisted this year.
Most noteworthy is that the company is continuing to repair its balance sheet by selling properties, leasing some of them back and paying down debt. Three sale and leaseback transactions have closed so far in 2019 and the company’s net debt position is looking much better now.
Time to buy?
Buying the recovery in AutoCanada stock can be an appealing idea.
I wouldn’t say the company is firing on all cylinders yet, however, as it’s still facing some market challenges on the rebranded U.S. front, and selling some dealerships seems to be taking longer than desired. Still, I recognize that the Go-Forward strategic plan is taking good effect.
The stock is still trading at a discount to its book value for some good reason, however. Recent asset disposals have been done at a loss and, perhaps some of the balance sheet assets aren’t worth their book values anymore. Further restructuring charges may be taken as management turns around the company’s fortunes.
That said, the company has managed to grow same store sales on new retail units by 1.9% for the first nine months of this year, which is phenomenal given that a total market unit sales decline of 4.1% and a shrinking sales volume for its represented brands in Canada by about 6.2% during the same period.
Now that the market is shrinking for everyone else, how long will this company keep gaining market share amid an automobile distribution industry that’s reporting declining overall sales? I’m afraid that the shrinking market will finally catch up with ACQ and the company will sneeze like the rest of its competitors when it finally catches a cold again.
I would hold the stock, enjoy the quarterly dividend that yields 3.8% today while closely watching the developments on the wider North American car sales market for clarity on market growth potential.
The company will still need a growing broader market in order to achieve long-term financial prosperity.
