The Motley Fool

3 Reasons Why Canadian Tire (TSX:CTC.A) Stock Could Explode Higher in 2020!

Image source: Getty Images.

Canadian Tire (TSX:CTC.A) stock is trading in deep value territory today. Despite being one of Canada’s most iconic retailers, the stock has been hammered in 2020. Yet, for the most part, the company is in decent shape.

Could now be a good time to bet on this essential Canadian stock?

To answer this, let’s look at its recent Q1 results reported last Thursday. Despite negative pandemic impacts, Canadian Tire still grew comparable sales by 0.7% (versus 0.9% last year).

Fortunately, its Canadian Tire retail locations across Canada are considered essential and continue to remain open. Its SportChek, Marks, and Helly Hansen subsidiaries were not so fortunate, and are still mostly closed. As a result, overall revenues declined 1.6% compared to Q1, 2019.

For the quarter, adjusted earnings per share plunged to a loss of $0.13 a share, compared to a profit of $1.12 per share in 2019. Store closures, an increase in credit loan loss provisions, share compensation, and currency headwinds contributed to the overall loss.

While one can only guess that Q2 could be worse, Canadian Tire’s outlook for the second half of the year actually looks pretty good.

Here are three reasons why the stock could shoot up from here.

Summer bodes well for Canadian Tire’s stock

First, summer is coming and I think that bodes very well for Canadian Tire and all its subsidiaries. As virus restrictions are removed, Canadians will be looking to spend money closer to home: on house improvements, gardening, camping, and outdoor activities. Rather than travelling abroad, a trip to the lake or a local campground might be on the books instead.

Canadian Tire’s businesses caters perfectly to the stay-local, stay-in-Canada, be outdoors economy. I believe this could result in really strong results over the summer and into the fall.

Growth by e-commerce could see the stock get a re-rating

Second, the company has been investing in its mobile and online e-commerce platforms. In Q1, it addressed bandwidth/volume issues and is now working to implement an improved cloud-based platform by the end of 2020.

In Q1 alone, online order volume exploded 1,600%, and online sales across all segments increased 44%. As e-commerce opens up a new gateway for sales, Canadian Tire’s stock could see a valuation re-rating like Target and Walmart have experienced.

Canadian Tire is already a trusted name in Canada. It should be able to capitalize on its established supply chain and store locations to amplify a growing e-commerce business.

Canadian Tire is a bargain stock

While Canadian Tire’s stock has been nailed by short-sellers in the past, many of those positions have likely been removed. It is trading at a cheap nine times price-to-earnings ratio. Competitors like Walmart, Loblaw, and Home Depot are trading between 22 and 24 times price to earnings.

TD Securities Analyst Brian Morrison recently noted that if you remove the market value of  Canadian Tire’s stake in CT REIT and the financial services segment, the retail business  is trading for a mere 1.6 times 2021 normalized earnings. That is insanely cheap, especially given that a large part of that retail business is still operating well!

In Q1, management further increased liquidity by securing a $650 million credit facility (despite already sitting on$650 million of cash/cash equivalents). As a result, management plans to maintain its 4.5% dividend. I think the dividend should remain safe as long as all segments can return to operation over the summer.

The Foolish bottom line

Canadian Tire is a great stock for investors looking for deep value, and an attractive yield. There are inherently some risks, particularly in its financial segment and retail subsidiaries.

However, the stock is so cheap right now that the upside far outweighs any downside, short-term risks. I think as summer warms up, this stock could heat up quickly as retail-shy investors finally remember the true value of this favourite Canadian company.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

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 Robin Brown has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot and recommends the following options: long January 2021 $120 calls on Home Depot and short January 2021 $210 calls on Home Depot.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.