With the economy weakening due to the significant increase in inflation over the last couple of years and the inevitable interest rate increases, it’s no surprise that many stocks, especially discretionary businesses, have struggled. However, the underperformance of these stocks has created opportunities, especially for this Canadian retailer that has been flying under the radar.
Canadian Tire (TSX:CTC.A) has recovered from its 52-week low in recent months and is actually up 23.5% year to date, with the stock’s close of $171.24 on Wednesday. Yet, it still trades 20% lower than its all-time high reached in mid-May 2021 at $213.85.
Trading at just over $170 a share, CTC.A stock currently has a forward price-to-earnings (P/E) ratio of just 10.2 times. So let’s look at why Canadian Tire stock is flying under the radar and how much potential it has to rally over the next year.
Canadian Tire had a tough first quarter to start the year
Although it has rallied to start the year, Canadian Tire stock has pulled back the last few weeks after reporting first-quarter earnings, which were below expectations.
Canadian Tire Retail comparable sales were down 4.8% in the first quarter of 2023. The company attributed the decline to the impact of a mild winter and the late arrival of spring.
However, Canadian Tire stock is much more than Canadian Tire’s retail operations. For years, it has been growing and expanding its operations by acquisition as well which, in addition to providing growth potential, has also helped to diversify its operations.
So while Canadian Tire Retail saw a slowdown in sales the past quarter, Mark’s registered its 11th consecutive quarter of comparable sales growth, up 4.8%. SportChek comparable sales grew 3.7%, and Helly Hansen revenue was up 22.9%. All of this led to Canadian Tire reporting normalized diluted earnings per share of $1.00 for the first quarter of 2023.
And while these results came in below consensus expectations and were somewhat disappointing, the larger picture shows that the retail conglomerate continues to invest in growing and expanding its business over the long haul, especially with the expansion of its Triangle Loyalty program.
Furthermore, while investors would prefer to see Canadian Tire continue to report positive quarters, the pullback in the stock can create excellent buying opportunities, which we’re seeing today. CTC.A stock is trading at an attractive valuation and offering a compelling dividend yield.
This Canadian retailer is flying under the radar with a forward P/E ratio of 10.2 times
Canadian Tire is trading at just 10.2 times its expected earnings over the next 12 months. Not only is that a low P/E ratio in general, but it’s also below Canadian Tire’s historical averages.
Over the last 3, 5, and 10 years, Canadian Tire has had a forward price-to-earnings ratio of 10.8 times, 11.1 times, and 12.9 times, respectively.
Therefore, while the stock is undervalued, investors have the opportunity to gain or increase their exposure to this high-quality Canadian retail stock. Furthermore, at just over $170 a share, Canadian Tire, which has increased its dividend for 12 consecutive years now, offers investors a yield of just over 4%.
That’s an impressive dividend yield for a stock that offers attractive long-term growth potential.
And on top of the attractive valuation and compelling dividend yield, Canadian Tire’s average analyst target price is $213.91, a roughly 25% premium to where the stock trades today.
So if you’re looking to take advantage of the market environment and buy high-quality stocks while they are undervalued that you can hold for years to come, Canadian Tire is certainly one to keep your eye on.
