Monday, April 7, 2014

AutoCanada (TSX:ACQ)

The crown jewel is AutoCanada, whose shares have climbed by more than 80% since it appeared in the August 23, 2013 edition of Take Stock. The S&P/TSX Composite is up 13% over this same period.

AutoCanada is Canada’s only publicly held owner of auto dealerships. And this company has a huge runway in front of it as current dealership owners are nearing retirement and looking for an exit strategy that monetizes their life’s work. AutoCanada is that exit strategy.

It’s important to understand the distinction in the auto industry between the companies that make the cars (and their well-documented inability to consistently perform over the years—GM’s current ignition issues are one of many examples) and the dealerships that sell them, which are rarely unprofitable. The beauty of the dealership model, we believe, is that the bulk of the business is covered by the servicing, parts, and used car segments, all of which provide a recurring revenue stream. Which to us makes the more cyclical new car sales portion of the business more or less gravy.

AutoCanada has recently added two GM dealerships in Saskatchewan, which is a big development because it indicates that GM Canada is warming to the idea of publicly held companies owning its dealerships. In addition, AutoCanada’s recently released quarterly results were well-received by the market; those results indicated an increased pace of near-term dealership acquisitions over what had been anticipated.
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