Canadian Tire Is Still a Good Defensive Pick

Is Canadian Tire Corp. (CDNTF.PK) the ideal defensive retail stock during uncertain economic times?

Analyst Vishal Shreedhar of UBS Canada made his case in a note to clients Wednesday, saying the auto parts and housewares retailer’s underperformance this year (an 11% year-to-date decline compared with a 6% drop in the S&P/TSX composite), is inconsistent with its track record of consistent earnings growth.

Mr. Shreedhar, who rates the shares a “buy” but reduced his price target to C$82 from C$91, said since 1980 Canadian Tire has traditionally led the market during recoveries.

The TSX typically bottoms 4-6 months before the end of a recession. UBS projects economic recovery in the second half of 2008, which could suggest Canadian Tire’s share price is closer to the bottom than the top.

In addition, he said that the large retailer

has outperformed the market during every broad-based sell-off, which we attribute to its diversified and defensive business model, and solid market position.

Despite a drop in same-store sales of 2.7% in the third quarter, Canadian Tire “still delivered 12% per share earnings growth,” and “free cash flow is supportive of higher dividends.”