AutoCanada is a leading North American automobile dealership company. It operates through 50 dealerships comprising of 21 brands in Canada and 11 brands in the U.S. AutoCanada caters to a large, diversified geographic customer base through its multi-location automobile dealership model.
The company earns revenues by selling new and used vehicles and providing services like parts and collision repair, and finance and insurance. Almost 88% of its revenue is derived from the U.S. and the balance is from Canada. The company is associated with some of the most popular brands of vehicles like Cadillac, Infiniti, Nissan, Hyundai, Audi, Volkswagen, Mercedes-Benz, BMW, Ford, etc.
AutoCanada’s reporting segments are Canada and the US. Its Canadian Operations segment currently operates 50 franchised dealerships in Canada, in 8 provinces and its U.S. Operations segment, which has been re-branded as Leader Automotive Group, currently operates 13 franchises comprised of 11 brands.Investment Data
- Opportunity Score: 7
- Ticker: TSE:ACQ
- Sector: Consumer Cyclical
- Industry: Auto & Truck Dealerships
- Market Cap: 0.80B
- P/E: 0.00
- Dividend Yield: 0.00%
- Payout Ratio (Earnings): 0.00%
- Canadian Dividend Aristocrat: NO
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
- Dividend Growth Fit: 1/10
- Dividend Income Fit: 0/10
Revenue Growth & Market Exposure
AutoCanada offers a diversified range of automotive products and services, including new vehicles, used vehicles, vehicle leasing, vehicle parts, vehicle maintenance, and collision repair services, extended service contracts, vehicle protection products, and other after-market products. The company also arranges financing for customers through various financial institutions and receives a commission from the lender and also for facilitating the sale of third-party insurance products to customers. AutoCanada receives various incentives from manufacturers based upon units sold to retail or fleet customers.
AutoCanada’s multi-location business model enables it to serve a diversified geographic customer base. Its Canadian dealerships sold nearly 61,000 vehicles in the last year while its U.S. dealerships sold ~9,900 vehicles.
AutoCanada is focusing on growth through acquisitions. It is continually looking for buying family-owned dealership businesses to grow. Its acquisition of the US Grossinger Auto Group added eight metro dealerships in Chicago, selling and servicing six different brands. The company is in a favorable position to benefit from a growing total vehicle demand. It is focusing not only on new vehicle sales but also on used vehicle sales.
The pandemic had an adverse effect on the auto sector and sales plunged in the months of March, April, and May. For the first two months of Q2 2020, AutoCanada’s performance was negatively impacted by COVID-19. Its total retail vehicle unit sales, however, improved by 28% YoY, in June. The company’s total retail unit sales improved gradually quarter-over-quarter. AutoCanada re-engineered its business model to position itself better for top decile operating performance with permanent annual cost savings of ~$10 million. The company’s revenue has grown at a rate of 14% CAGR in the last ten years.
AutoCanada suspended its current dividend payments which will result in ~$11 million in annualized cash savings and ~$8 million in savings for 2020. The company successfully reduced its net indebtedness and generated free cash flow during the quarter.
AutoCanada has been gradually transitioning to an operations-centric automotive group. The company has been working on a systematic transformation of new operational methodology since 2018. It continues to focus on implementing and building upon its Go Forward initiatives for Canadian operations. The strategy will emphasize used vehicle sales while continuing to focus attention on the new-vehicle market. The F&I initiative has already helped increase gross profit per retail unit and sales of more used vehicles through retail rather than wholesale. The US operations also benefitted from a reset of all vendor contracts and restructuring of compensation towards performance-based arrangements. AutoCanada’s revenues from Finance & Insurance and Parts, Service & Collision Repair form part of more stable, recurring, and high margin revenues.
The overall Canadian market for vehicle sales has grown by 2% CAGR for the period from 2000 to 2019. Canadian companies are leading the way in developing transformative automotive technologies. Canada is one of the top 10 producers of light vehicles globally and Canadians continue to buy more vehicles each year, both new and used. AutoCanada is well-positioned to leverage this opportunity. The pandemic will further force people to own their own vehicles rather than relying on public transport. The pandemic might also alter consumer buying patterns and customers could be more drawn to the used cars.
AutoCanada outperformed the Canadian new retail market for six consecutive quarters. The company competes with the likes of Uni-Select Inc, Exco Technologies Limited, NFI Group, Magna International Inc for auto parts. Uni-Select is a leading distributor of automotive refinishes as well as automotive aftermath parts, while Exco is a global designer and manufacturer of equipment, components, and assemblies; NFI is a leading independent global bus manufacturer offering a comprehensive range of mass transportation solutions and Magna International is a global automotive supplier and one of the largest auto parts manufacturers in the world.
The auto sector experienced a big bounce-back as economies reopened. AutoCanada’s focus on OEM relationships including achieving sales unit and customer satisfaction targets should support this growth. The company is well-positioned to capitalize on recovery and its focus on improving customer retention should further pave a way for sustainable future growth.
Even before the dividend suspension, this dealership buyer wasn’t doing well. Even if the dividend comes back, the business needs to do better in general. There are changes happening in the car industry with TaaS and it’s not clear if they are operating a dying business model …