August 8, 2012 Comments

The Canadian stock market was down 0.7% today but the U.S. markets were about flat. Toll Brothers was up another 1.9% as a report showed that U.S. house prices are now slowly rising. It reports earnings on August 22.

It is interesting to watch RONA claim that it is adopting a new strategy of smaller stores and therefore Lowe’s should go away and not buy it up. The thing is though RONA had only small stores some years ago and then made the bone-headed decision to try to compete head-on with Home Depot. It seems to me the solution is for Lowe’s to buy up all the RONA box store locations and leave RONA have the small stores.

RONA also claims it buys most of its products in Canada. Well that is laudable, but if they can’t make a good return, it is simply not sustainable.

Canadian Tire will report earnings tomorrow (Thursday). The conference call is at 4:30 pm eastern but it is not clear what time the earnings will come out. Hopefully it will be before the open. I am hopeful but also apprehensive about the results. They already said they will take a “charge” to close some of the Forzani sports stores that they bought. That news should be baked in. Other than that they will have to show good results or else the market price will be under pressure due to fears of competition from Target and Lowe’s.

Canadian Tire has a P/E of only about 11.3 and a Price to book ratio of 1.3. It seems to have been well managed. And I think its Board is strong.

I think it could improve its earnings if it wanted by doing a sale and lease back of its stores to a REIT. Canadian Tire is trying make an ROE of I believe 12% or so and REITs seem satisfied with much less than that so it might make a lot of sense to sell the stores and sign 20 year leases to rent them back. Their would be a large profit on the transaction and the cash could be used to buy back shares and raise the dividend.

Unfortunately Canadian’s Tire dual class shares may allow it to refuse to take this step. It may be immune from any kind of take-over attempt.