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AutoCanada Rides Alberta Trucks to 187% Return: Corporate Canada

AutoCanada Inc. (ACQ), the country’s largest publicly traded chain of car dealerships, is using sales of trucks to Alberta oil workers to fund higher dividends and buy out competitors.

Shares of the Edmonton, Alberta-based company have jumped 187 percent over the past year and reached a record C$42.95 on Nov. 11. That was after the company said profit rose 61 percent in the fiscal third quarter from a year earlier and boosted its dividend for the 11th quarter in a row.

“We are in a good market, good economy,” Pat Priestner, the 58-year-old chief executive officer of AutoCanada, said in a Nov. 12 telephone interview. “We sell a lot of trucks and sports utility vehicles, that’s a big help, because of where we are, more so in British Columbia and Alberta.”

Canadian new automobile sales are on pace for a record this year after a recession ended in 2009 and financing rates dropped. Consumer spending has kept increasing even as Bank of Canada Governor Stephen Poloz warned that imbalances such as high home prices and record consumer debts were the main domestic risk to the economy.

AutoCanada revenue rose 35 percent to C$403.5 million ($386.8 million) in the third quarter from a year earlier, according to the Nov. 7 earnings report, while profit increased to 51 cents a share from 34 cents a share a year. The company boosted its dividend to 21 cents from 20 cents, more than doubling the 10-cent payout offered in mid-2011.

Family Owned

AutoCanada owns 32 franchised dealerships including brands such as Audi and Fiat, has 1,500 employees, sold about 30,000 vehicles and handled 309,000 repair jobs last year. The company bought two Chrysler outlets in Calgary and Winnipeg, Manitoba, last quarter and plans to buy another four to seven dealers in the next 18 months.

“The industry is kind of ripe for consolidation,” said Priestner. “There are so many family-owned businesses, the average age is probably over 60 for those.”

The company’s higher share price is helping to make the cost of financing such acquisitions cheaper than for closely held dealers, said Priestner, who says he started out as a “lot boy” moving cars around while in high school.

“I was 16 or 17, and then I started selling cars and just worked my way up and bought my first dealership for I think about C$10,000 down,” he said.

Beating Peers

AutoCanada’s one-year return is almost double the next-closest among auto retail stores tracked by Bloomberg, with Medford, Oregon-based Lithia Motors Inc. gaining 96 percent. It also exceeds the 13 percent gain of the Standard & Poor’s/TSX Composite Index. The company’s shares fell 1 percent to C$41.57 at 4:57 p.m. today in Toronto for a market value of C$902.9 million, up from about C$4 in October 2011.

The company’s strength in faster-growing western Canadian provinces, bolstered by employment in mining and oil-sands projects, has helped it grow, said Derek Dley, vice president of equity research at Canaccord Genuity (CF) in Toronto.

“Positioning the company around truck sales in these high-growth markets has really allowed AutoCanada to deliver healthy growth,” said Dley, who rates the company a buy with a C$46 price target.

Car and light truck sales reached 1.5 million through October, according to DesRosiers Automotive Consultants Inc., already greater than full-year sales in data dating to at least 2006.

Discretionary Spending

Sales of cars and light trucks in the U.S. climbed to an annualized rate of 15.2 million in October from 14.4 million a year earlier and compared with a recent peak of 16 million in August.

RBC Capital Markets and Canaccord Genuity raised their price targets for the company after the last earnings report. The company has four buys, one hold and one sell and the average 12-month price target is C$46.90, according to data compiled by Bloomberg.

“This is a discretionary spend, obviously, and because the focus is on western Canada they’re reliant on commodity prices,” Vivian Lo, who helps manage C$7.9 billion at Aston Hill Financial Inc. in Toronto, said by phone yesterday. “If you see a complete slowdown in commodities and consumers stop spending, this will affect their business.”

Aston Hill has held the stock since May 2013. It has pared some back a bit at this level, but they still own it and continue to like it, she said. The firm holds just under 200,000 shares.

‘Visible Growth’

“It’s visible growth and it’s a visible consolidation play in Canada in which they’re the only publicly traded way to get access to this trade,” Lo said.

The economy’s modest growth and banks that have continued to lend through the crisis should sustain future gains, Priestner said. Canadian gross domestic product expanded 1.7 percent in the second quarter compared with 2.2 percent in the first and is forecast to have advanced 2.2 percent in the third quarter according to the average estimate of 20 economists surveyed by Bloomberg.

“The economy is good and people want new vehicles,” he said.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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