AutoCanada Inc. (ACQ.TO)

(A Top Pick Dec 30/16. Up 1%.) A buyer of auto dealerships. The stock ran up to about $90 and then fell. The owners had said they were going to make 2 or 3 acquisitions annually and integrate everything, but actually made 14 acquisitions in one year, and didn't get it integrated. They were heavily invested in Alberta and BC dealerships when Alberta got hit with the oil problems. New management came in and are only doing 2 or 3 acquisitions a year. They are now doing what they had said they were going to do originally, which is why he likes the story.

(Market Call Minute) There could be a catalyst coming up. You want to be here for a good tie and not a long time as the Canadian auto sector is a bit long in the tooth.

(A Top Pick March 28/17. Up 11%.) Started liking this at around $20. Trading at about 12X earnings. Last quarter they beat their numbers. They’ve put a lot into cost containment. Also, the Alberta economy has come back. Car sales have also been better. He expects it to track into the high $20 over the next year.

AutoCanada (ACQ-T) or Uni-Select (UNS-T)? One of the big issues is that they are concentrated in oil producing areas. A lot of their dealerships are in Alberta. That has hurt a lot. Feels management has not done a great job of guiding the street correctly. She is not a fan. At this point in the cycle, you probably don't need to be anywhere near the car cycle. It's too late in the cycle.

(A Top Pick Nov 29/16. Up 16%.) He still likes this very much. They purchase auto dealerships around Canada. New management has come in and are diversifying out of Alberta and BC. He can see the stock going much higher from here.

One of the smaller companies he has. There are a lot of good things happening. He likes the long-term for the business generally. Servicing of automobiles gets more complex every year, and increasingly servicing gets done at dealerships. The majority of their business is in Alberta, but that has shrunk significantly. Today revenue out of Alberta is less than 50%. It still yields a little under 2%, a little low, but decent for the sector. There are better days ahead for them.

Highly recommended by some brokers and had a strong run up. Basically, it was consolidating different auto dealerships. Unfortunately, the main focus of their assets was in Alberta, and along came the price drop in oil, and the market went right down the drain. That was a major hit. They’ve stabilized and are still in the process of consolidating, but he thinks we are “long in the tooth” in the auto cycle, which makes the whole sector suspect. He would sit on the sidelines and see where the auto cycle goes.

They are doing a pretty good job of consolidating the auto dealer industry. They were hit because a lot of them were in Alberta, but they are now going in the right direction. It is a question of time until the stock price recovers, but he does not think it will hit its previous highs. Be prepared to hold it for a while.

He continues to buy shares at these levels. In the past, they made way too many acquisitions, and were not able to execute on them. They also didn’t integrate their back-office very much. Also, were heavily weighted in Alberta/BC. Hopefully they are going to be geographically in a better situation over the next several years. He is looking for them to make only 2 or 3 acquisitions a year. The stock is cheap at these levels.

Publicly traded auto dealers which own a lot of dealerships across Canada, but their primary strength is in Western Canada, which is why they took a hit for the last couple of years. That has now stabilized and they’ve also diversified outside of Alberta. There is a sense that the auto cycle is peaking, so there’s not a lot of upside for the overall picture. Last quarter, they seem to have underperformed to what National sales have done in the Western provinces. It has to be figured out whether or not they can demonstrate cost control and leverage and continue to diversify.

A great concept, and initially there were savings in aggregating a bunch of dealerships. Unfortunately, they started in Alberta. Until there is more diversification across Canada, or until we get a big recovery in Western Canada, this is a stock that is not going to do much for you.

The issue that continues is that so many of their dealerships are in Western Canada and tied to the oil business. As long as that is the case it will trade up and down with oil. There are a lot of dealers that are looking to retire and in some cases they don’t have anyone to sell their business to. There is a lot of room there and we have not seen any US companies come into Canada.

This collapsed when they were buying auto dealerships, integrating them, and supplying technology to their back-office, etc., but they never integrated them, made 14 acquisitions in one year and were primarily in BC and Alberta. New management came in and did a lot of things the old management didn’t do, including reducing the number of acquisitions per year. They are now one of the largest players. Trading at about 11X earnings. They throw off about $40-$50 million of free cash, which they will use to buy a couple of other dealerships. Dividend yield of 2.2%. (Analysts’ price target is $22.)

(A Top Pick March 28/17. Down 14%.) This is a restructuring story, so it is going to take a while to pull itself out. Their mission is to acquire as many Canadian dealerships as possible. Got hurt last year when they overextended, plus they have a lot of dealerships in Alberta. In their last quarter, they actually had weakness in Ontario and BC. Car sales are kind of steady and falling off which is hurting them. They need to acquire 6-8 dealerships a year, because they can get efficiencies. This is incredibly cheap and is going to stay cheap for a while. Thinks there is a recovery in the mix. Expects it will be up substantially a year from now.

He likes this and feels there’s higher upside on the stock. They purchase auto dealerships and then centralize the back offices, cutting their cost structure down. It is the service side where they make all the money. When new management came in, they cut the dividend and the stock collapsed. He bought it at around $18-$20. He likes that their dividend is a reasonable dividend now, and they have decided they are going to only buy 1 or 2 places a year. Originally, they were geographically in Alberta and BC, which hurt them in the last several years. They are trying to diversify geographically across Canada.