Canadian tire (TSX: CTC.A) Ontario stores closed this week. As part of the province’s response to the ongoing COVID-19 pandemic, stores are no longer considered “essential” services. This will have a final impact on the bottom line and the valuation of the business.
Investors need to consider the impact and determine if the stock is worth buying or selling at its current price. Here’s a closer look at Canadian Tire’s assessment.
Impact of the judgment
The most populous province in Canada, closing stores cannot be great for Canadian Tire. The company said its online store remains open for delivery. Meanwhile, items can also be picked up on the sidewalk. However, it seems unlikely that the company could avoid a drop in sales this quarter.
The shutdown could last for weeks or even months. Investors have no way of knowing for sure.
However, the current closure is not the biggest problem facing Canadian Tire. Indeed, hardware stores across the country have benefited from a booming housing market and a dynamic economy that has accelerated in recent years. Today, economic conditions have radically changed.
Unemployment hit a historic high while consumer confidence fell to a historic low. I believe that social isolation will help us smooth out the COVID-19 infection curve soon, but the economy may take much longer to heal. Canadian Tire’s future cash flows could therefore be significantly lower. Consequently, the valuation must be adjusted.
Canadian Tire Review
At first glance, Canadian Tire seems to be an undervalued opportunity. The company has a real estate portfolio, strong brands and decent profit margins.
However, the balance sheet throws its valuation into disarray. At the time of writing, the company had long-term debt of $ 9.63 billion, 1.74 times the value of its equity and almost twice its market value.
In fact, Spruce Point Capital Management, a short seller based in the United States, argued that the company had much more debt than had been announced. When lease obligations, dealer loan guarantees and third-party bank guarantees are taken into account, debt is much higher.
Meanwhile, the retailer’s commercial real estate portfolio could lose value as the closure persists. In other words, the carrying amount of the business could deteriorate as its cash flow decreases, increasing the debt burden.
Canadian Tire could find itself at the epicenter of a double shock. A commercial mortgage crisis could reduce the value of the company’s assets. Meanwhile, a corporate credit crunch could make its debt toxic. I think prudent investors should stay away.
Canadian Tire was already the target of short sellers. Too much debt and a vulnerable retail business model made the title risky. Now the lingering problems have grown. The shutdown could last for weeks or months longer. Meanwhile, Canadian Tire’s debt burden increases as cash flows evaporate.
All the compelling reasons to buy the stock are now gone.
If you hold stocks in your passive income portfolio, consider reducing your exposure. If you don’t and are looking for a good deal in this stock market crash, I recommend looking elsewhere. Stay safe!
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The crazy contributor VRaisinghani has no position on any of the titles mentioned.