AutoCanada Inc.: An Interesting Way to Bet on an Alberta Recovery

It has not been a good three years for AutoCanada Inc. (TSX:ACQ).

In June 2014, amid great excitement over the company’s plan to consolidate Canada’s incredibly fragmented auto dealership sector, shares peaked at nearly $90 each.

And then the wheels fell off. Approximately half of the company’s earnings came from Alberta, which was a good place to be when the energy sector was doing well. Thousands of oil employees needed new pick-up trucks for work.

The company’s Alberta dealerships saw earnings decline, and the energy sector has been persistently bad since. AutoCanada shares plunged, eventually falling to under $20 each before recovering slightly.

While earnings have collapsed over the last few years -- the bottom line went from $2.30 per share in 2014 to $0.09 in 2016 -- free cash flow is still relatively healthy.

The company posted free cash flow of $1.70 per share in 2016 and analysts project earnings will recover to $1.69 per share in 2017 and $2.22 in 2018. That gives shares a relatively attractive price-to-forward earnings ratio.

Once earnings start to recover, AutoCanada can start to acquire more auto dealerships. Acquisitions have slowed to a trickle at this point, but the company did recently buy a Chrysler dealership in Guelph, Ontario.

Ultimately, AutoCanada is a sentiment story. It is Canada’s only publicly-traded auto dealership stock. If investors want a way to play this consolidating market with plenty of growth potential, AutoCanada is the choice.

When sentiment surrounding the sector improves, AutoCanada’s share price is likely to go up as well. A recovery in Alberta will certainly help as well.