AutoCanada (TSX:ACQ) is engaged in the operation of franchised automobile dealershipsin multiple Canadian provinces as well as Illinois, United States. The company’s offerings include new vehicles, used vehicles, vehicle leasing, vehicle parts, vehicle maintenance and collision repair services, to list a few.
The company reports a market capitalization of $373 million with a 52-week high of $14.32 and a 52-week low of $7.33. Here’s why AutoCanada makes for a good investment.
An interpretation of the numbers
For the nine months ended September 30, 2019, the company reports a strong balance sheet with positive retained earnings of $378 million.
Unfortunately, the company reports a negative tangible net worth (retained earnings – intangible assets – goodwill) of -$75 million, suggesting that the company doesn’t have any real value.
Despite this, the company remains committed to reducing its long-term debt, which will eventually bring the company back into positive tangible net worth territory.
Overall revenues are growing from $2.4 billion in 2018 to $2.7 billion in 2019 (+12.6%), which has resulted in increased gross profits of $431 million in 2019. AutoCanada finished the period with a $13 million loss, up slightly from the $47 million loss in 2018.
Cash flows continue to be a solid with a noticeable cash outflow under financing activities. The company repaid $139 million of long-term debt while drawing $45 million, thereby demonstrating fiscal responsibility on the part of management.
The company ended the period with $32 million of cash, indicating that the company can self-fund modest growth.
But wait, there’s more
Looking at the company’s notes to its financials indicate a couple of important items.
Firstly, the company generates the majority of its revenues from new vehicle sales (56.6%) followed by used vehicles (25.3%). Unfortunately, the cost of sales is highest for new vehicles, which reduces the gross income received by the company.
Insurance and finance continue to be the highest margin item, albeit represent a fraction of the revenues generated by the company. As the company grows, I would like to see it engage in more insurance and financing activities to grow its bottom line.
Second, in the third quarter of 2019, the company recognized restructuring charges of $13 million related to the anticipated closure of two franchises in Q4 2019.
Although this may sound like negative news for many investors, I’m very pleased with this announcement as it highlights the company’s proactive approach to managing its franchises.
By closing down two locations, AutoCanada sends a message to its shareholders that it would much rather incur a restructuring charge than allow the businesses to operate at less than optimal.
Third, the company pays dividends to its shareholders, which means that investors will be able to benefit from capital gains and passive income. The current dividend yield is 2.94%.
Foolish takeaway
Investors seeking to diversify their portfolio and purchase shares of a car dealership company should consider buying shares of AutoCanada.
Despite the company’s negative tangible net worth, it appears that senior management is adept as indicated by its commitment to reduce long-term debt.
With growing revenues, a proactive management approach and a solid dividends, investors should consider buying shares.
