October 23, 2013 Comments

On Wednesday the S&P 500 was down 0.5% and Toronto was about unchanged.

There were a couple of big gainers today, CN up 4.4% and FirstService up 4.9% as both released strong earnings.

I’ve long considered both to be excellent companies though both (and especially FirstService) had seemed too expensive at last check.

The Canadian Tire REIT CT Real Estate Investment Trust started trading today. It rose marginally above the $10.00 IPO price. I understand that for the first few weeks the investment bankers will “support” the stock price, or attempt to, by buying shares if needed.. That sounds like some kind of “legalized” stock price manipulation and I believe that is just what it is and it done for every IPO. It’s yielding 6.5% as I understand. I don’t have an opinion on its value but I assume it will most likely stay above he $10 level (barring any increase in interest rates which is starting to look less likely)

Canadian Tire Corporation still owns about 83% of CT REIT. The whole purpose of this exercise was to “reveal” the value of Canadian Tire’s real estate and drive up the share price. That is a form of financial engineering and it has worked. I suppose that is okay if the stock price was under-valued previously and I definitely think that was the case. I would have preferred to see at least 50% and as much of 100% of the Real Estate sold since investors are willing to pay so much for REITs.

We can now attempt some interesting math for Canadian Tire Corporation.

The REIT has a market value of $1.76 billion. (I had earlier seen reports of $3.5 billion but I calculate $1.76 billion). Canadian Tire itself has a market cap of $7.7 billion. So the rest of Canadian Tire Corporation minus the entire REIT is valued at about $6.0 billion. This may seem low when we consider that Dollarama is valued at $6.3 billion and Canadian Tire has far more locations (including its Marks and FGL sports locations) and vastly more retail space. Canadian Tire’s financial Services division is worth a great deal. (It accounts for about 41% of profits and is presumably worth at least $2 billion) Canadian Tire also still owns significant real estate outside of the REIT. This appears to leave the retail division not valued that highly. Financial statements for Q3 and certainly by Q4 may reveal that the Canadian Tire stores (The 490 actual Canadian Tire branded stores) are not that profitable after they pay rent to the REIT. The fact that Canadian Tire owned its own real estate may have been masking relatively low profits on the store. But then again Canadian Tire “retail” is really mostly a wholesale operation since its dealers own the actual retail businesses at each Canadian Tire store.

I suspect Canadian Tire is not over-valued at $96 and may remain somewhat under valued. This is going to become more clear as it begins reporting under the new arrangement. Canadian Tire’s next step may be to sell off a portion of its finance operations in order to reveal the value of that component of the operation.

Canadian Tire’s next earnings release, which should occur with a few weeks id going to be interesting and could cause the stock price to move. I’ve taken some profits along the way but I also feel comfortable hanging on to a relatively lasrge position here.