AutoCanada Inc. shares have almost tripled over the past year, with recent gains coming from the exciting news that the company has secured its first General Motors franchise. But that doesn't mean you've missed your chance at this country's only publicly traded owner of auto dealerships.
The stock looks as if it has room to grow. Even after its big surge, it is still reasonably priced, with a forward price-to-earnings ratio of less than 13.
However, I'm stepping away from my plan to give the shares an unqualified "go." Instead, I think a little yellow-light caution is in order.
First, a little background: Industry veteran Patrick Priestner spent more than a decade collecting auto dealerships and building the privately owned Canada One Auto Group Ltd. By 2006, Canada One had 14 locations and visions of being a national auto-retail company.
In the United States, similar mega auto retailers went public and grew quickly. In Canada, however, many major auto makers appeared reluctant to sell franchises to publicly owned companies, for reasons not altogether clear. So when Mr. Priestner and his co-owners spun off part of Canada One Auto Group into AutoCanada Income Fund in 2006, the idea was for the public entity to focus on cash distributions as much as on growth.
Even without the biggest names – no Toyota , no GM , no Ford – AutoCanada managed to post stellar results. The company's heavy concentration in Alberta, where vehicle sales outpaced national averages, and its reliance on the surprisingly successful Chrysler brand (which provided 75 per cent of sales) help to explain much of its success in 2011.
Of course, those same factors raise questions about AutoCanada's future with other brands in other provinces. The new GM deal raises other concerns.
To win the auto maker's consent for public ownership of the Nicholson Chevrolet dealership in Edmonton, AutoCanada structured the deal so it has a 31-per-cent economic interest of the dealership but no voting control. Instead, Mr. Priestner and other AutoCanada executives have invested alongside the company, and Mr. Priestner has 100-per-cent voting control of a special entity created to hold the shares in the dealership.
This structure, in which executives have a duty to AutoCanada but also have separate interests in an individual dealership, creates a potential conflict of interest. The company, recognizing this, had the deal reviewed by the independent directors on its board.
If this were an ingenious solution to win the approval of major auto makers with reservations about public-company ownership, well, we could look past it. The problem, however, is that it is not an isolated incident.
For some time, the company has allowed its executives to personally own dealerships of brands "which have not accepted public ownership." In January, 2011, Mr. Priestner and others bought their second Toyota dealership in Edmonton, where the company owns three competing Chrysler and Hyundai dealerships.
In June of last year, AutoCanada expanded the policy to also allow ownership of any dealership the company "chooses not to purchase." The policy revision was done, according to board chairman Gordon Barefoot, because AutoCanada desired "innovative means by which to better attract and retain key employees."
It is unclear to me why a company needs to set up a system that allows for its executives to have sideline businesses in the same industry. Their focus, it seems, should be on running AutoCanada, not on running other dealerships that compete with their employer.
It should be noted that Mr. Priestner not only made $1.4-million in compensation as CEO last year, but he is 80-per-cent owner of Canada One Auto Group, which owns 42 per cent of AutoCanada stock. Canada One Auto Group collected $2.6-million in dividends last year and its holdings in AutoCanada are worth more than $100-million. (As a bonus, 13 of AutoCanada's 24 locations are leased from Canada One Auto Group at a cost of $11.6-million in 2011.)
President Tom Orysiuk says AutoCanada has a strong independent board, with no past personal relationships to management, reviewing these transactions. When AutoCanada went public, he said, the company's underwriters advised them to keep the land and buildings with Canada One Auto Group rather than place them in the public company.
However, executive vice-president Steve Rose acknowledges the company has no agreements with the executives to acquire their personal dealerships if the auto makers change their minds on public ownership, and it has no right of first refusal if the executives sell their dealerships.
Mr. Orysiuk and Mr. Rose say there are synergies created when "the private side" and "the public side" of AutoCanada own dealerships in the same market, and the culture of the auto-retail industry allows for any number of ownership structures to retain key employees.
I believe, however, that AutoCanada needs to think more like a public company than a private one. Shareholders are likely to see gains in the shorter term. However, they would be better served in the long term by a cleaning up of the entanglements between the company's interests and its executives' personal pocketbooks.