The market has been buzzing about AutoCanada’s remarkable performance lately, and for good reason. The Edmonton-based auto dealership group has seen its shares surge nearly 90% since January, creating one of the Canadian market’s most compelling comeback stories of 2024.
What’s driving this automotive retail renaissance? BMO Capital Markets just doubled down on their confidence in the company, raising their price target from $25 to $50 – a move that sent investors scrambling to reassess the stock’s potential.
“The company’s dramatic deleveraging has fundamentally changed the risk profile,” explains John Nelson, auto retail analyst at BMO. “Their debt reduction strategy has proven more effective than anticipated, completely transforming how investors should value this business.”
AutoCanada’s journey hasn’t always been smooth. The pandemic created unprecedented challenges for auto retailers, with inventory shortages and consumer hesitation plaguing the industry. The company’s share price had languished below $15 as recently as October 2023, reflecting widespread concerns about interest rates and consumer spending on big-ticket items.
But a perfect storm of positive factors began brewing earlier this year. First, AutoCanada reported fourth-quarter results that substantially beat analyst expectations, with adjusted EBITDA reaching $30.8 million – well above consensus estimates of $24.7 million. Management highlighted substantial progress on their USA segment profitability and stronger-than-expected Canadian operations.
Then came the most significant catalyst: debt reduction. The company announced it had repaid approximately $115 million in debt during the first quarter alone, bringing its net debt to adjusted EBITDA ratio down to 1.9x – the lowest level since 2018.
“What we’re seeing is a textbook case of how operational discipline can transform investor perception,” says Marissa Chen, portfolio manager at Northland Wealth Management. “The market is rewarding AutoCanada for addressing its balance sheet concerns while simultaneously improving operational efficiency.”
The company operates 82 dealerships across Canada and the United States, representing 28 automotive brands. This diversification has proven valuable as different segments of the market recover at varying rates. Luxury brands like BMW and Mercedes have shown particular resilience, with higher margins helping to offset volume challenges in the mass-market segment.
Used vehicle operations have become another bright spot. AutoCanada reported a 12% year-over-year increase in used vehicle gross profit in their most recent quarter, demonstrating their ability to capitalize on the ongoing affordability challenges in the new vehicle market.
The Bank of Canada’s recent interest rate cuts have added fuel to investor optimism. The central bank lowered its benchmark rate to 4.75% in June and followed with another cut in July, easing one of the primary headwinds for auto retailers. Lower rates typically translate to more affordable financing for vehicle purchases, potentially unlocking pent-up consumer demand.
“The rate environment shift couldn’t come at a better time for AutoCanada,” explains David Ferguson, economist at RBC Capital Markets. “We’re seeing early signs that consumers who delayed vehicle purchases are starting to return to the market, and AutoCanada’s improved operational profile positions them to capitalize on this trend.”
Not all analysts share BMO’s extreme bullishness, however. Scotia Capital maintains a more moderate price target of $36, citing ongoing concerns about inventory normalization and potential margin compression as vehicle supply improves. They acknowledge the company’s impressive debt reduction but question whether current growth rates are sustainable.
The stock’s dramatic rise has also raised questions about valuation. AutoCanada now trades at approximately 9.5x estimated 2024 earnings, above its historical average of around 7x. This premium reflects improved fundamentals but leaves less room for error if market conditions deteriorate.
Management remains focused on their multi-year strategy of optimizing their dealership portfolio, enhancing digital capabilities, and continuing to strengthen their balance sheet. During their last earnings call, CEO Paul Antony emphasized the company’s disciplined approach to growth.
“We’re not just chasing volume,” Antony stated. “We’re building a resilient business that can thrive in various market conditions while delivering consistent returns to shareholders.”
Looking ahead, several key factors will determine whether AutoCanada can maintain its momentum. The pace of interest rate reductions, consumer confidence trends, and the normalization of new vehicle inventory will all play crucial roles in shaping the company’s performance through the remainder of 2024.
For investors considering the stock after its remarkable run, the question becomes whether the improved fundamentals justify the current valuation. The consensus appears to be cautiously optimistic, with most analysts acknowledging the significant operational improvements while maintaining awareness of broader economic uncertainties.
As the automotive retail landscape continues to evolve, AutoCanada has positioned itself as a potential market leader. Whether the stock can maintain its torrid pace remains to be seen, but the company has certainly shifted into a higher gear.
