Autocanada

A Hedged Consumer Cyclicals Play On A Recovery In Oil Prices

AutoCanada's stock has plummeted recently due to the sharp decline in oil prices. 2/3 of the company's auto dealerships are outside of Alberta and are expected to do better due to low oil prices.

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This is a well-run company, with solid fundamentals, and is currently undervalued. AutoCanada (OTCMKTS: OTC:AOCIF) (TSE:ACQ) is the largest publicly traded multilocation auto dealership company based in Canada. As of last year, they had 48 auto dealerships distributed all over Canada as shown on the map below. (click to enlarge)

In recent years, the company has also diversified the make of its auto dealerships as shown below. (click to enlarge)

The Bears Have It Wrong

Approximately one-third of all dealerships are in Alberta, whose economy is highly dependent on the price of oil. For instance, Alberta's unemployment rate is expected to increase to 6.8% from the current 4.3%. This will cause a decline in disposable income in Alberta of 0.5-1.0%. Accordingly, housing starts are expected to decline 11.3% in 2015 and another 4.2% in 2016. It is important to note that the remaining two-thirds of AutoCanada's dealerships are outside of Alberta and overall, declining oil prices will increase disposable income by $1000 on average. Hence, a boost to sales outside of Alberta is likely to offset the declining sales in Alberta. As such the dramatic decline in AutoCanada's stock as shown below seems unjustified. Let's remember that this is a stock with a healthy dividend yield of 2.11%, 5-yr revenue growth of 11.3% annually, and EBITDA growth of 18.9% annually.

ACQ data by YCharts

Is It Good Business? Billionaire investor, George Soros, made the news recently for showing interest in a large auto dealership company. Warren Buffett, had beaten him to the punch by purchasing Van Tuyl chain of dealerships, the largest privately owned auto dealership company in the U.S. Even Bill Gates

has a 15%...