Analyzing Canadian Tire's Sole Ownership of Financial Services Division and Analyst Recommendations for Canadian Tire, McDonald's, and Volkswagen Stocks

2023-11-01 19:09:01

Retailer Canadian Tire has once again become the sole owner of its financial services division. (Photo: 123RF)

What to do with Canadian Tire, McDonald’s and Volkswagen stocks? Here are some analyst recommendations likely to move prices soon. Note: the author may have an opinion completely different from that expressed.

Canadian Tire (CTC.A, $133.76): a strategic buyout at a high price

Retailer Canadian Tire announced yesterday the purchase of Scotiabank’s 20% stake in its financial services division for an amount of $895 million.

Thanks to this acquisition, Canadian Tire regains full control of its Canadian Tire Financial Services division. The retailer’s management maintains that the transaction will allow it to increase its flexibility “in offering added value to the more than 11 million active members of its loyalty program (Triangle Rewards), in particular its 2.3 million of credit card holders.”

Analyst Vishal Shreedhar of National Bank Financial points out that Canadian Tire will record a charge of $328 million under this transaction, or the equivalent of $5.88 per share, in its third quarter results. fiscal year 2023.

The transaction will be financed by short-term financing and by obtaining an 18-month loan of $400M.

“The transaction was carried out, according to our calculations, at a valuation of 14.4 times the expected earnings per share for the next 12 months, which is high,” adds the analyst, who recalls that Canadian Tire had sold the stake of 20% at Scotiabank in 2014 at a valuation of 10 times.

“We assume that purchase price reflects senior management’s strategic value creation vision,” he says.

Vishal Shreedhar specifies that Canadian Tire is buying the 20% portion of its financial services division before launching a strategic review of the latter’s activities next year, which is unusual. “We believe the retailer wants to divest its financial services division in whole or in part in order to focus on its retail operations.”

He says he understands that Canadian Tire Financial Services adds a layer of risk and some complexity, but that the division has been a long-term growth vector for the company. “The merits of buying back the 20% stake will be clearer when the strategic review process is completed. One thing is certain, adding debt at this point in the economic cycle will add to investors’ pessimism towards the company,” he believes.

It is waiting for the unveiling of third-quarter quarterly results on November 9 to modify its financial models. For the moment, he therefore maintains his recommendation of “performance equal to the sector” for the stock and his one-year target price of $166.