It hasn’t been a great year for one of Canada’s most respected brands. Prior to yesterday’s big jump, Canadian Tire (TSX:CTC.A) was about flat year to date. A typical steady performer, Canadian Tire’s stock has been unusually volatile.
Many times this year, it was trading at levels not seen since the financial crisis. Yesterday, the company released third quarter results in which it missed on both the top and bottom lines. Earnings of $3.46 per share missed by a penny while revenue of $3.3 billion missed by $130 million.
Why did Canadian Tire (TSX:CTC.A) jump on missed earnings
Despite the miss, the company’s stock price jumped by 4.54% yesterday and its stock price is now firmly in positive territory for the year (5.46%). Is this the turnaround that shareholders have been waiting for?
Although the headlines showed weakness, the company is actually on solid financial footing. For starters, it had solid same-store sales across all its segments – Canadian Tire (+2.4%), Mark’s (+1.2%) and SportCheck (+4.6%). This is a key retail metric to gauge company performance.
The company also announced an ambitious $200 million cost-cutting initiative. It will focus on eliminating duplicate systems and decommissioning legacy systems among other initiatives. The savings are expected to be fully realized by 2022.
Canadian Tire raises its dividend
Another sign of strong performance? Canadian Tire raised its dividend by 10 cents to $1.1375 per share. It marks the ninth consecutive year of dividend growth for the company. Considering its low payout ratio (low 30s), the company is poised for strong dividend growth for years to come.
Despite the one-day earnings bump to its share price, Canadian Tire is still cheap. The company is trading at a price of 11.83 times earnings, far below its historical average of 13.84 time earnings. As mentioned, there hasn’t been this big of a gap between current and historical prices since the financial crisis.
Once the company returns to trade inline with its average, the share price would jump to approximately $178 per share based on full-year earnings. This implies 19% upside from today’s share price of $150.71 per share.
Analysts are equally as bullish. Of the 13 covering the company, 12 rate it a “buy” or “strong buy” and they have an average one-year price target of $174.67 per share. Even the low price on the street of $159.00 implies 6% upside from today’s price.
Canadian Tire is delivering strong results despite an environment in which traditional box retail stores are under pressure. It continues to post strong same store sales, and has been able to adapt to the changing retail environment.
At today’s prices, Canadian Tire remains a bargain.