Canadian Tire Corporation Limited (TSX:CTC.A) is a Canadian staple. More than 90% of Canadians shop at one of its stores every year. Its name-brand recognition is ubiquitous.
Despite these advantages, the stock still cratered by 35% during the recent market crash. Is this your chance to buy a blue-chip stock at a deep discount?
The headwinds are clear
It’s not hard to see why this stock is struggling. As a major retailer operating hundreds of stores, Canadian Tire will be crushed by the coronavirus pandemic. Foot traffic will fall significantly due to social distancing.
Meanwhile, the worst jobs report in Canadian history was revealed last week. Since the downturn began, more than three million Canadians have either lost their jobs or seen their hours reduced.
There’s also another challenge that has been overshadowed by the coronavirus crisis: the oil price collapse.
Oil started the year priced at US$60 per barrel. Today, prices are closer to US$20 per barrel, a rare event. Prices this low have only been experienced twice in the past 60 years.
The loonie has taken a hit given that the energy sector accounts for 10% of Canada’s GDP, not to mention billions in government tax revenue. But the biggest concern for Canadian Tire will be employment. More than 800,000 Canadians are employed in the energy sector. Millions more are indirectly reliant on the oil and gas industries.
If oil prices remain at current levels for the rest of 2020, Canada will take a huge economic hit. And unlike the coronavirus impact, this disruption could be permanent, as the vast majority of Canada’s oil and gas projects are generating massive losses right now.
Many mega-projects require oil prices of US$40 per barrel or more simply to break even. Oil prices would need to double to reach those levels.
Canadian Tire investors are focused on the coronavirus impact, but long term, the oil price collapse could create economic havoc across wide swaths of the country. It could permanently shutter large producers, greatly reducing employment and discretionary spending.
Is Canadian Tire a buy?
Canadian Tire stock now trades at 2014 prices. On many metrics, the stock looks cheap. Shares trade at 1.5 times book value, a nearly 25% discount to its five-year average. But is that cheap enough to warrant an investment?
On March 23, the stock’s valuation bottomed out at 1.1 times book value, which represented a 50% discount to its five-year historical average. That’s likely the discount you’d expect for a brick-and-mortar retailer that will see sales crushed in 2020. Only if you’re expecting a quick economic rebound would a 25% discount make sense.
The fact is that the economic recovery won’t be quick. As we’ve seen from past downturns, economic disruption takes months, sometimes years to fully correct. Just take a look at the S&P/TSX Composite Index, which is currently trading at 2007 prices!
If you think the economy is out of the woods, perhaps you’ll heed the advice of Warren Buffett’s long-time partner, Charlie Munger.
“We’re not playing,” Munger told The Wall Street Journal, indicating that it’s still time for caution. “We’re like the captain of a ship when the worst typhoon that’s ever happened comes. We just want to get through the typhoon.”
When asked if he and Buffett were preparing to buy at current levels, Munger didn’t express much bullishness. “We will be fairly conservative,” he answered.
To be certain, there are many stocks now trading at lucrative valuations. But buying a traditional retail stock at a 25% valuation discount isn’t a compelling deal.
