Canadian Tire is updated and rated (lower) Buy at $125.50. The stock is up 26% this year to date. We had rated Buy at $99.49. Normally it might be expected to rate a weak buy / hold after a 26% gain in 11 months. But the earnings per share have risen about 14% since the Q3 2013 numbers that we used to arrive at the Buy rating for the start of this year. Based on earnings it is roughly 10% more expensive per dollar of earnings than it was year ago.
A bit if history…
I have mixed feelings about Canadian Tire’s performance. I still own 700 shares and so I benefit from the rise. But in the late Summer of 2011 I owned 3736 shares and the price was $57 (and my price paid was likely below that). It was my largest position. Back then the stock was selling down close to book value and seemed like an obvious bargain. We had it rated Strong Buy at $52.40 in an update of August 27, 2011. I mentioned it to a number of people back then even outside of this web site and the general reaction was quite skeptical.
Somewhat regrettably I started selling too soon as the stock rose in price. It had been over 20% of my portfolio which by conventional wisdom was WAY too high. Perhaps I should have ignored such conventional wisdom and let it run up to 30% of my portfolio. In any case I made good money on this investment despite taking some potential gains off the table too early. Also, I did buy some back on dips after selling and then sold those again later but that helped my return versus simply selling.
At its current price it could keep rising. But it could also easily slip back 10% or more on an earnings stumble. Such a slip would likely be a buying opportunity.
I notice the Canadian Tire voting shares CTC are now trading at $255 over 100% higher than the non-voting shares CTC.a The voting shares are extremely thinly trades (635 shares today). I have been skeptical about the huge premium on the voting shares for a long time. And so far I have been wrong. But I firmly believe that these voting shares are an accident waiting to happen. Over 90% of the voting shares are held by the founding Billes family (Matha Billes 41%, her son 20%), the dealers association and the employees profit sharing plan. In this situation the ability to cast a vote seems pointless as the controlling owners can always win every vote. Possibly someone is trying to get a hold of several percent to try and get a Board seat. Back in the 80’s there was a big take-over battle for Canadian Tire and someone tried to buy control by offering a high price for only the voting shares. The courts ruled against it and there is now a stipulation that if someone buys a majority of the voting shares then all shares become voting. It does not look like anyone could gain control without all shares becoming voting. In theory one might gain effective control by buying only Martha Billes 41% but it is highly likely that such a move would face challenges. And, if someone wanted to Buy Martha’s shares, why would they fool around buying a few percentage on the market at a huge premium?
I conclude that the $255 voting shares are an accident waiting to happen. Someday, someway they will end up worth no more than the non-voting shares. That is my long-term prediction.
On Tuesday the S&P 500 was down 0.1% and Toronto was up 0.4%.
Couche-Tard was up 4.0% on another good earnings release.