Canadian automotive dealership and repair chain AutoCanada’s (TSX: ACQ) stock price has dropped more than 26% so far this month. Shares have been in a tailspin since the company’s nearly 30% revenue growth in a recently released set of financial results on March 2, 2023, failed to please an expectant ACQ stock investor base. Could this be the time to wear a Warren Buffett hat and get greedy while others are fearful?
What happened?
AutoCanada reported a 16.1% year-over-year growth in fourth-quarter revenue to $1.39 billion and a strong 29.8% surge in the full-year 2022 revenue to $6.04 billion. Sales revenues continue to break new records, as the company’s acquisitions-led growth strategy combines with its used-vehicle-anchored sales growth formula to deliver a surge in top-line sales.
However, profitability took a heavy knock in 2022, and investors fear the situation may linger for longer.
Full-year net income at $85.4 million declined by 48% year over year, profit margins shrank by 60% and earnings per share (EPS) for 2022 declined 49% to $3.03.
It didn’t matter much to AutoCanada stock investors that adjusted earnings before interest, taxes, depreciation, and amortization expenses (adjusted EBITDA) increased 13% sequentially in 2022. Perhaps the reasons why the company’s EBITDA growth strayed from net earnings were a bit unsettling.
Problems at AutoCanada
AutoCanada’s revenue growth was largely led by a surge in used vehicle sales. Used vehicle sales grew 48% year over year in 2022 to eclipse legacy new vehicle sales (which increased by 10% for the year). Revenue from used vehicles comprised nearly half the company’s annual sales (at 47.5% of sales). Although used vehicle sales continue to grow at a faster clip than legacy new vehicle volumes, gross margins in the fastest-growing business line are shrinking fast.
The company made incremental writedowns on its used vehicle stock to their net-realizable value during the past quarter. Writedowns on used vehicles increased to $29 million in 2022 — up from $9 million in 2021. Revenue growth is still okay, but it’s not so appealing when margins are shrinking fast.
Further, AutoCanada experienced a strong surge in finance costs in 2022 as interest rates surged. Despite rising interest rates, the company more than doubled its net debt to more than $445 million during the past year. The balance sheet could go bad very fast. Debt could soon be a problem again if the auto sales market shrinks in a recession.
Should you buy the dip?
A rapid decline in a company’s stock offers potentially profitable entry points for contrarian investors who see potential in the company’s growing business. AutoCanada has a growing business, and its acquisitions-led growth strategy is delivering double-digit revenue growth rates and could be accretive to earnings, too.
Most noteworthy, positive same-store sales growth rates give sustained hope for organic growth. However, AutoCanada stock may still not be the best growth stock out there right now.
The company has been actively repurchasing its shares during the past year. It bought back more than 17% of the balance of its outstanding shares in 2022. The remaining investors have a growing stake in the business. Management is upbeat about AutoCanada’s future financial prospects, and insiders bought a significant number of shares during the past few months.
That said, it’s still possible that AutoCanada stock could be a falling knife that may hurt if you catch ACQ stock right now. I would wait on the sidelines and watch how used-vehicle margins and debt metrics change going forward.
