We’ve made it no secret about underappreciated credit risk at companies like KSS, TGT, M and SIG. While the complexity and the magnitude of credit exposure on these names is far greater than what the Street appreciates, at least the issue is on the radar. But then there’s Canadian Tire (CTC-TSE) a name with $7.5bn in cap that a) not many US Retail investors know exists and b) don’t appreciate that it has just as much credit risk as the biggest Retail offenders in the US. Oh…and by the way, it’s trading at a 27-year high.
This is officially a new short for us and sits at the top of our vetting bench.
- Domiciled in Toronto, with 100% of revenue coming from Canada. Our Financials and Housing Teams are very bearish on both Canadian Banks and Canadian Housing due to our view that most of Canada is in in the midst of a massive housing bubble like that which caused the great recession in the US.
- CTC has CAD$12.5bn in revenue that goes far beyond Automotive. If you want a space heater, leaf blower, elliptical machine, automatic coffee brewer, or (of course) a backyard hockey net – the Canadian Tire is the place to go.
- Three operating units at CTC…
- A Retail operation with 32mm SQFT through 1700 stores all across Canada. The company has several store brands ranging from sports stores, wholesale sporting goods, clothing stores, gas stations, and mass merch/department stores. Retail accounts for 50% of EBIT.
- A Financial Services / Credit operation offering a range of Canadian Tire Brand MasterCards with $4.8bn CAD in receivables. EBIT from this credit operation accounts for 30% of total EBIT.
- A REIT operation of properties with Canadian Tire stores making up 97% of REIT min rent. This accounts for about 20% of EBIT.
Let’s think for a minute…what types of companies will get hurt most when a credit bubble bursts (especially in a housing driven recession)? REITS? Check. Credit Card issuers? Check. Retailers of everyday goods for ‘Middle Canada’ (I just made that up as a corollary to Middle America – if it’s not a ‘thing’ I’ll change it, maybe). Check.
The stock is at a 27-year (all time) high, and is trading at about 14.5x earnings, a 3% comp in perpetuity, and zero margin erosion over time (sounds like the Canadian Target).
If the Canadian economy keeps skating along without missing a beat, then this cash flow stream – and stock – might not miss a beat. And we stress the word ‘Might’. But from our vantage point – at least relative to price and expectations – this might be the most underappreciated consumer/retail credit-risk story in North America. If the consensus numbers are wrong by the magnitude we think they could be, then there’s no reason we can’t see a hsd multiple on down earnings. It’s happened before and is likely to happen again. It’s our job to drill down duration.
We’ll have a deck on this in the coming weeks. Eh?
