Advertisement
Canada markets closed

  • S&P/TSX

    21,807.37
    +98.93 (+0.46%)
     

  • S&P 500

    4,967.23
    -43.89 (-0.88%)
     

  • DOW

    37,986.40
    +211.02 (+0.56%)
     

  • CAD/USD

    0.7275
    +0.0012 (+0.16%)
     

  • CRUDE OIL

    83.24
    +0.51 (+0.62%)
     

  • Bitcoin CAD

    87,729.24
    +1,010.10 (+1.16%)
     

  • CMC Crypto 200

    1,373.95
    +61.33 (+4.67%)
     

  • GOLD FUTURES

    2,406.70
    +8.70 (+0.36%)
     

  • RUSSELL 2000

    1,947.66
    +4.70 (+0.24%)
     

  • 10-Yr Bond

    4.6150
    -0.0320 (-0.69%)
     

  • NASDAQ

    15,282.01
    -319.49 (-2.05%)
     

  • VOLATILITY

    18.71
    +0.71 (+3.94%)
     

  • FTSE

    7,895.85
    +18.80 (+0.24%)
     

  • NIKKEI 225

    37,068.35
    -1,011.35 (-2.66%)
     

  • CAD/EUR

    0.6824
    +0.0003 (+0.04%)
     

Why AutoCanada (TSX:ACQ) Stock Fell 13% Today!

Vishesh Raisinghani
·3 min read
analyze data

AutoCanada (TSX:ACQ) stock has had a spectacular run this year. It’s up over 90%, despite the sell-off in the rest of the market and the slowdown in growth stocks. However, this morning, the stock dropped by double digits. Here’s a closer look at why AutoCanada stock is plunging and what investors need to know about the road ahead.

AutoCanada’s resurrection

My Fool colleague Brian Paradza, CFA described AutoCanada as the ultimate turnaround story. The business was failing until 2019. A painful restructuring and expansion into the U.S. allowed the company to rebound strongly. By early 2020, the company was reporting earnings that were far ahead of analyst expectations.

Beating expectations helped the stock soar 600% over the past year. That performance beats some noteworthy tech stocks. In fact, it’s better than Bitcoin’s performance against the U.S. dollar over the same period.

ADVERTISEMENT

Analysts justified this outperformance by pointing to AutoCanada’s growth strategy and relative undervaluation. The company is on an acquisition spree to consolidate Canada’s fragmented auto dealership market. Much of Canada’s auto dealership network is owned and operated as small family businesses. Consolidating the market with capital raised on public equity and debt created immense value for the company.

This quarter, management forecast sales of between $960 and $980 million. Considering its recent run, most investors must have expected AutoCanada to surpass this range. However, management disappointed investors yesterday.

AutoCanada earnings

The company reported first-quarter earnings yesterday. Revenue was up 36.8% over the past year to $969.8 million. That’s precisely on target with management’s guidance. Since investors were expecting a beat, the stock seems to be selling off in early morning trading.

AutoCanada stock is down 13% at the time of writing. The broader sell-off in growth stocks in North America today could be intensifying this plunge.

Concerns about higher interest rates could be another trigger. Although AutoCanada has reduced debt over the past year, debt is still 3.7 times larger than shareholder equity. If the cost of borrowing rises, while growth slows, that could dent AutoCanada’s prospects.

The road ahead

The latest earnings report could indicate that AutoCanada’s strong rebound is moderating. Used and new cars sold at record prices throughout last year, while debt was cheaper than ever. Both these trends could reverse in 2021. Meanwhile, AutoCanada is no longer beating earnings, but merely meeting expectations.

That’s probably why the stock is down today. However, the stock is still trading at a price-to-sales ratio of 0.25 and a forward price-to-earnings ratio of about 13.5. If it can tackle its debt and keep its acquisition spree going, it should perform relatively well in 2021, despite the headwinds.

Bottom line

AutoCanada has had a fabulous run over the past year. Unsurprisingly, growth has now slowed down. The latest earnings report met expectations rather than surpassing them. Meanwhile, debt remains a concern.

Nevertheless, AutoCanada stock is undervalued and could be a contrarian bet for investors with an appetite for risk.

The post Why AutoCanada (TSX:ACQ) Stock Fell 13% Today! appeared first on The Motley Fool Canada.

Looking for another rebound stock? Here's a pick:

Should you invest $1,000 in Suncor Energy right now?

Before you consider Suncor Energy, you may want to hear this.

Motley Fool Canadian Chief Investment Advisor, Iain Butler, and his Stock Advisor Canada team just revealed what they believe are the 10 best stocks for investors to buy right now... and Suncor Energy wasn't one of them.

The online investing service they've run since 2013, Motley Fool Stock Advisor Canada, has beaten the stock market by over 3X. And right now, they think there are 10 stocks that are better buys.

Learn More Today!

More reading

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned.

5 Years From Now, You’ll Probably Wish You’d Grabbed These Stocks…Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. You aren’t on the list to receive our newest stock picks — but it’s not too late. 2021