Morningstar | Financial Services Propels Better-Than-Expected Quarter at Canadian Tire; Shares Slightly Rich
After it posted solid third-quarter results, we plan a mid- to high-single-digit percentage uptick for our CAD 144 per share valuation for no-moat Canadian Tire. However, we do not see a material change in its long-term standing, leaving our 10-year view (low- to mid-single-digit revenue growth, 12% adjusted EBITDA margin on average for the next decade) in place. We see the shares as somewhat rich, considering Canadian Tire's exposure to intense competition in an industry with negligible switching costs.Year to date, Canadian Tire posted 6% revenue growth against an 11% adjusted EBITDA margin, near our 5% and 12% respective full-year targets, though our estimates assumed results would be backloaded considering the Helly Hansen acquisition, which closed in July. The retail units, which combine for just over 70% of pro forma sales, are performing in line with our expectations, with the namesake stores, FGL, and Mark's posting 1.7%, 0.4%, and 3.3% respective revenue growth against our corresponding 1.0%, 0.5%, and 2.5% targets.
The financial services unit (9%% of pro forma sales but over 30% of unadjusted pretax income) is ahead of our expectations, with revenue up nearly 9% and return on receivables at 6.88% versus our 7% and 6.14% respective full-year marks. Management credited its efforts to boost in-store financing, bolstered by the launch of the Triangle Rewards loyalty program and linked credit cards. We believe the initiatives should help lift sales of larger-ticket items, such as furniture, while encouraging store visits. However, the credit expansion carries risk, as customers tend to be on the lower end of the credit spectrum. We believe returns on receivables have benefited from strong economic conditions, and while Canada's new trade deal with the United States mitigates short-term risks (assuming ratification is not derailed), we expect returns to average around 6.7% long term, below current levels and their 7.44% five-year historical average level.
Canadian Tire Corporation comprises three main business operations, which provides a range of retail goods and services. Co.'s three main business operations are: Retail, which is conducted through a number of banners, including Canadian Tire, Canadian Tire Gas (Petroleum), Mark's, PartSource, and various FGL Sports banners; CT REIT, which is a real estate investment trust engaged in owning, developing and leasing commercial properties; as well as Financial Services, which markets a range of Canadian Tire-branded credit cards, insurance and warranty products and processes credit card transactions with respect to purchases made in Canadian Tire associate stores and Petroleum outlets.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.