Canadian Tire, Savaria & XLI
Canadian Tire, Savaria & XLI:
This week we look two Canadian winners and an American defensive play (literally). The short-term, overall market outlook is sideways as hot inflation numbers continue to joust with the bulls on Bay and Wall streets. The only dividend play on this list is Savaria.
This Laval, QC company makes stairlifts, elevators and other in-home adjustments to help seniors live in their existing homes instead of moving into far more-costly nursing homes. Aging demographics strongly favour this business long term, but Savaria shares have underperformed since peaking in July 2021. At that time, they hit $22.42 by then plunged $10 by last summer. Savaria’s five-year chart approximately shows this range, though the stock continues to pay a 3.15% dividend yield. Long-time investors have been lamenting Savaria’s performance, but their hopes have been revived lately.
The company issued guidance last week and shares popped from $15.15 to $16.75. Savaria is expecting revenue growth of approximately 8-10% with expected adjusted EBITDA margins of roughly 16% in fiscal 2023. This will happen if organic growth from its accessibility and patient care segments continues, driven by a high backlog, cross-selling and strong demand. Meanwhile, there is a shortage of affordable long-term beds in facilities. Another tailwind, if the company can pull it off, is integrating the Swedish company, Handicare, which cost Savaria C$521. Another plus: supply chain problems are easing.
Savaria’s revenues have grown from $120 million in 2016 to $661 million in 2021 (the last reported full year). Accordingly, operating income has also climbed from $18.19 million to $49.18 million in the same time frame. However, the same cannot be said of net income, which was $12.3 million in 2016, then topped $26.46 million in 2020 but then fell to $11.54 million in 2021.
Of course, Covid had an impact. Add to that the purchase of Handicare in March 2021. By the way, Handicare has sales in 40 countries with primary manufacturing done in the U.K., Holland, the U.S. and China. Again, the demographics work in Savaria’s favour in these countries and China’s current reopening adds more promise.
The street thinks so, with three strong buys and two moderate buys with a median price target of $20.75. Expect the price to continue to climb until Savaria reports on March 21. That will be a crucial report, because it will confirm or disprove the latest positive guidance. (Disclosure: I own shares of Savaria.)
It’s been a treacherous time for retail as it struggles with rising wages, a worker shortage, higher shipping costs and fears of a recession. The consumer is either paying down and spending at Dollarama or 1% are splurging on luxury. Having a strong e-commerce platform still helps retail stocks, post-Covid. Canadian Tire largely benefits from this environment. It remains one of the most powerful brands in the land and there are locations almost everywhere.
Some numbers: CTC’A trades at a 9.92x PE, pays a 3.95% dividend yield backed by a safe 33.24% payout ratio. That valuation, by the way, has been the same since last July and is a far cry from July 2020 through June 2021 when it topped 17x. CTC’A is trending above its 50-day moving average of $154.53 and 200-day of $159.03, while the street sees a higher PE of 10.16x. Quarterly revenue growth YOY rose 3.9% and earnings growth 4.6%.
Compound earnings growth over the last three years was 13% annually, more than double the increase in the share price. Bay Street has been loving this name, with shares popping 23.42% so far this year compared to the TSX rising 5.8%. However, CTC’A has been playing catch-up, since its share have been -9.23% for the past 12 months while the TSX has sunk only -1.91%.
Of course, there’s no rule to say that Canadian Tire will return to TSX levels, but momentum is certainly on CTC’s side. Popular market sentiment expects an economic downturn, if not recession, which means consumers will stick with tried-and-true brands offering lots of discounts like Canadian Tire.
Agriculture and defense are two of the most defensive (pun unintended) areas of the stock market now. Spiking food costs drives the need for more efficient food production while (unfortunately) today’s uncertain geopolitics fuel defense stocks. The Industrial Select Sector ETF, trading in New York, is by far the biggest industrial fund out there and holds a basket of ag and defence names.
XLI charges only 10 basis points, pays a small 1.58% dividend yield, but it holds some heavy hitters: Honeywell, UPS, Union Pacific, Boeing, Raytheon and Caterpillar in that order. Yes, GE also sits in this basket, but so do Lockheed Martin and Deere. The biggest holding, Honeywell, has exposure to defense, but more so automation in manufacturing, a growing area and one that’s needed in the current labour shortage.
Deere just reported a fine quarter, trades at a reasonable 15x PE and is a long-term agricultural play. Lockheed enjoyed a strong 2022, but has been choppy of late; it’s a strong defense stock with roughly half of company revenues coming from the U.S. Defence Department. If you’re an ESG investor, skip this. Another caveat: XLI has run up lately and its chart of the past year suggests a pullback, rather than a breakout. Buy on weakness.