Cost Transformation And Collision Expansion Will Shape A Cautious Yet Balanced Outlook

Catalysts

About AutoCanada

AutoCanada operates a network of franchised automobile dealerships and collision centers across Canada, providing sales, financing and vehicle servicing.

What are the underlying business or industry changes driving this perspective?

• Although the company is nearing completion of its sizable cost transformation, the need to reinvest in marketing, training and sales incentives to rebuild unit volumes could erode much of the $115 million savings target over time. This may limit the durability of recent EBITDA margin gains and pressure future earnings.
• While the collision business is currently growing quickly on the back of OEM certifications and insurance referrals, rising repair complexity and intermittent storm driven volume spikes may force greater use of lower margin sublet work, which could constrain the ability of this segment to drive sustained margin expansion and profit growth.
• Despite a currently resilient Canadian consumer backdrop and modest interest rate relief, any normalization in vehicle demand or credit availability as pent up replacement cycles ease could cap same store sales recovery and keep consolidated revenue growth below management’s 2026 objectives.
• Although divestiture of U.S. dealerships will reduce leverage toward the 2 times target, concentrating the footprint solely in Canada could heighten exposure to domestic brand cycles and regional economic downturns. This may increase earnings volatility and limit balance sheet capacity for accretive M&A.
• While management plans to pivot from restructuring to disciplined growth across new, used and fixed operations, prior volume losses tied to headcount, inventory and marketing cuts suggest rebuilding dealer level talent and customer satisfaction scores may take longer than expected. This could delay operating leverage benefits and net margin improvement.

Assumptions

This narrative explores a more pessimistic perspective on AutoCanada compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming AutoCanada's revenue will remain fairly flat over the next 3 years.
• The bearish analysts are not forecasting that AutoCanada will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate AutoCanada's profit margin will increase from 0.4% to the average CA Specialty Retail industry of 9.4% in 3 years.
• If AutoCanada's profit margin were to converge on the industry average, you could expect earnings to reach CA$475.0 million (and earnings per share of CA$20.68) by about December 2028, up from CA$21.2 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 1.4x on those 2028 earnings, down from 24.2x today. This future PE is lower than the current PE for the CA Specialty Retail industry at 21.3x.
• The bearish analysts expect the number of shares outstanding to decline by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.17%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If management successfully rebuilds new and used vehicle volumes on the materially leaner cost base by the end of 2026 as planned, operating leverage could drive a faster than expected rebound in revenue growth and a meaningful uplift in EBITDA margin and earnings.
• The Collision business, already compounding revenue at a double digit rate and targeted for further M&A, could scale into a higher return, structurally growing segment that diversifies away from cyclical vehicle sales and lifts consolidated margins and earnings.
• Deleveraging through U.S. dealership divestitures and a net funded debt to EBITDA ratio trending toward 2 times may expand balance sheet capacity for accretive acquisitions in Canada, potentially accelerating top line growth and boosting long term earnings power.
• A resilient Canadian consumer backdrop combined with modest interest rate relief could support stronger than expected demand for vehicles and F&I products, improving same store sales, stabilizing used gross profit per unit and enhancing revenue and net margins.
• Continued execution on OEM certifications and insurance referral partnerships in Collision, alongside better internal sourcing of used vehicles and higher service bay retention, could deepen customer lifetime value and structurally raise gross profit and long run earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for AutoCanada is CA$20.35, which represents up to two standard deviations below the consensus price target of CA$30.61. This valuation is based on what can be assumed as the expectations of AutoCanada's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$36.0, and the most bearish reporting a price target of just CA$20.35.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be CA$5.1 billion, earnings will come to CA$475.0 million, and it would be trading on a PE ratio of 1.4x, assuming you use a discount rate of 11.2%.
  
• Given the current share price of CA$22.17, the analyst price target of CA$20.35 is 8.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.