Is Canadian Tire Stock a No-Brainer Buy?

With Canadian Tire stock trading well off its highs and analysts expecting a recovery in the next few years, is it worth buying today?

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Over the last few years, with all the headwinds the economy has faced, the stock market has continued to create many opportunities. While some businesses have thrived due to the economic landscape, others, like Canadian Tire (TSX:CTC.A), are temporarily struggling, creating a unique opportunity to buy these high-potential stocks while they are undervalued.

In the last four years alone, the economy has faced an unprecedented global pandemic that caused lockdowns worldwide. We needed tonnes of stimulus, then faced significant supply chain shortages before surging inflation and rapidly rising interest rates began to make everything more expensive for consumers and businesses.

These conditions have created consistent uncertainty about the market in the near term. And although many expected a recession and significant stock market sell-off, neither has yet to occur. Some stocks, like Canadian Tire, have sold off significantly, while others are reaching new highs.

Therefore, while you can find some of the highest-quality stocks trading cheaply, it’s essential to take advantage of the current market conditions. There’s no telling how quickly they could end up recovering.

Is Canadian Tire one of the best stocks to buy on the dip?

It’s no secret that Canadian Tire is one of the best-known brands in Canada and one of the top retailers in the country. Yet despite its already massive size; portfolio of other popular retail banners like Mark’s, Sport Chek, and Party City; and $8 billion market cap, Canadian Tire is actually one of the top long-term growth stocks on the TSX.

Prior to the significant macroeconomic headwinds that it and many of its retail peers have recently faced, Canadian Tire had ambitious targets to significantly grow its business and, more importantly, profitability by 2025.

This is important to note because not only is Canadian Tire trading exceptionally cheap today, but it’s not only a value stock that could rally back to fair value. It’s a long-term growth stock with significant potential.

Aside from these economic headwinds currently impacting its business yet expected to be transitory, Canadian Tire has a lot going for it.

It’s proven that it can grow both by acquisition and organically. It has one of the most popular loyalty programs, whereby it can leverage the data it generates to better serve its customers and drive higher sales. Plus, it invested heavily early on in building a high-quality e-commerce platform.

So, considering it’s only a matter of time before the economy recovers and discretionary spending picks up, and considering how cheap Canadian Tire stock is today, it’s certainly a no-brainer buy.

How cheap is the Canadian retailer?

With Canadian Tire trading at roughly $135 today, it’s down 29% from its 52-week high and is just 6% off its 52-week low. In terms of valuation, Canadian Tire trades at just 11.7 times its expected normalized earnings per share (EPS) in 2024 of $11.61. That’s lower than its 10-year average forward price-to-earnings (P/E) ratio of 12.7 times.

It’s also worth noting that these valuations are based on its expectations in this difficult operating environment, which shouldn’t last forever. For example, in 2022, Canadian Tire earned normalized EPS of $18.75, and analysts expect the retailer to recover back to those levels and beyond over the next few years.

That’s what gives Canadian Tire so much potential. Even at its current below-average forward P/E ratio of 11.7 times, if Canadian Tire could improve its normalized EPS to $14.68 in 2025, which is what analysts are expecting, its share price would rally by more than 25%.

Furthermore, should its recovery take longer than expected, Canadian Tire stock also pays an attractive annual dividend of $7 per share, which equates to a current yield of more than 5.1%. So you can already begin to earn a return as you wait for the economic conditions and Canadian Tire stock’s performance to improve.

Not to mention, that $7 annual dividend is far less than the $11.61 in normalized EPS that Canadian Tire earned last year — a down year.

Therefore, while this high-quality, long-term growth stock trades at such a compelling valuation, it’s certainly a no-brainer buy.

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 Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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