|Shares Out. (in M):||68||P/E||16.7||17.2|
|Market Cap (in $M):||11,014||P/FCF||31||33|
|Net Debt (in $M):||5,455||EBIT||1,125||1,093|
|Borrow Cost:||General Collateral|
Canadian Tire is a short. Canadian retail faces the same challenges as US retail, though they are only a few years behind. With the name trading at a 3% FCF yield, 2x book value and 13.5% ROE I view shares as expensive. Excluding the company’s stake in CT REIT (CRT-U CN) and assuming 1.5bn CAD for the financial services business, the retail business is trading at 7.3x 2018 EBITDA vs Macy’s at 4.7x. While Macy’s owns their real estate Canadian Tire has monetized it via their REIT. I see 20%+ downside to shares with a few near term potential catalysts (NAFTA, Min wage) and some free options (housing slowdown/bust).
Price Action: Despite missing 3Q estimates by 5% the stock traded up 3% on announcement of a dividend increase from 65cents to 90cents and increase in the payout ratio. I expect more misses going forward, which will weigh on valuation and eventually pressure the company’s ability to continue levering up to pay dividends and buyback stock (cash flow pre-financing, post divs/buybacks has been negative for 5 of past 7 quarters; net debt to ebitda at 3.4x).
Background: There have been a number of VIC writeups on the name which provide background on the company. Canadian Tire is today one of the largest retailers in Canada, selling automotive, living, fixing, sporting goods and apparel. They also have a bank which provides credit cards to Canadian consumers via partnership with Mastercard.