Investors who took a chance on Canadian Tire Corp. Ltd. during one of the most competitive periods in this country's retail history are being richly rewarded, and analysts believe there are more benefits to come.
The stock is trading near record highs as the iconic retailer successfully stickhandles its way around challenges posed by the growing presence of discount retailers from the United States, as well as increased competition from some of its homegrown peers.
The Toronto-based retailer is posting strong sales at its namesake locations, as well as at Mark's and its FGL Sports division, which includes Sport Chek and Atmosphere stores.
Investors are also keen on the growth from Canadian Tire's recent spinoff of its real estate investment trust. The company is also expected to get a financial partner for its credit card business, which analysts say would free up cash for the company and clean up its balance sheet. That money could be used to increase its modest dividend, buy back shares or make an acquisition.
Some analysts believe what's most attractive about the stock right now is that it's still considered a good deal for investors.
"From a valuation perspective, I think that Canadian Tire offers a good value as a retailer," said CIBC World Markets analyst Mark Petrie. "It's a challenged environment, but you're not paying a lot for the stock."
Canadian Tire shares are valued at about 8.5 times EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation and amortization), according to the analyst consensus for 2015 from S&P Capital IQ. When the retail division is broken out, that number drops to 4.1 times EV/EBITDA for next year, according to estimates from CIBC's Mr. Petrie.
"[Canadian Tire] continues to trade at the low end of its long-term valuation … and remains one of the cheapest discretionary retailers in North America," RBC Dominion Securities analyst Irene Nattel said in a note.
She is one of 10 analysts with a "buy" or equivalent rating on the stock, while two say "hold," according to S&P Capital IQ. It says the consensus price target for the next 12 months is $111.86.
Canadian Tire shares hit an all-time high of $107.35 last week, and are up almost 50 per cent over the past year. For long-term investors, the stock is up about 120 per cent since the depths of the last recession five years ago.
"Canadian Tire has good operating momentum and remains inexpensively valued, in our view, relative to its retail peer groups," Desjardins Securities analyst Keith Howlett said in a note.
Last week, he increased his price target to $125 from $113, believing the company's value will increase once it gets a credit card partner. That announcement is expected in the coming months.
Still, not everyone is as bullish on Canadian Tire stock.
Credit Suisse analyst David Hartley has a "hold" on Canadian Tire shares and a $97 price target, believing the stock is overvalued.
BMO Nesbitt Burns analyst Peter Sklar lowered his first-quarter earnings expectations for Canadian Tire, citing higher marketing and sponsorship expenses around events such as the Winter Olympics, but still rates the company "outperform" with a $110 price target.
Michael Bowman, portfolio manager at Wickham Investment Counsel Inc., has owned the stock for about two years and has no plans to sell at this time. "It has done extremely well in a very challenging retail environment," he said. "I see the trend continuing."
Bruce Campbell, a portfolio manager at StoneCastle Investment Management Inc., doesn't own the stock right now, but he said he's considering it. "If we got some sort of substantial pullback, then we would potentially add to our portfolio," he said.