Analysts: Canadian Tire Still a Good Defensive Stock

While analysts were disappointed in first quarter earnings at Canadian Tire Corp. (CDNTF.PK), which came in lower than expected, most retained their buy ratings on shares of the hardware and sporting goods retailer, saying it’s still a good defensive retail stock in a weakening economy.

They also brought up the question of whether Canadian Tire, a Canadian icon, is a consumer staples merchandiser or a discretionary retailer. RBC Markets analyst Irene Nattel says the first quarter results “confirmed that it is a little of both,” but leaning more towards the latter.

In a research note she said: Our takeaway is that it is more staple than discretionary, although investors must expect that the overall consumer spending slowdown will be reflected in revenue growth at the retail units. The Q1 results - with diluted earnings per share of C$0.68 on revenue of C$1.8-billion – were the result of a “messy” quarter that was hurt by a restatement of last year’s results and exacerbated by the shift of holidays and the addition of Family Day. Consensus estimates called for revenue of C$1.8-billion and EPS of C$0.80.

"Nevertheless, the overall outlook for 2008 remains unchanged, as does guidance of C$5.15 to C$5.40 [a share]," Ms. Nattel said, and pointed out that the company’s focus on controlling expenses and driving retail demand should allow Canadian Tire to deliver earnings growth in the back half of 2008. She is maintaining her outperform rating and target price of C$83, saying that with a stock price in the mid-C$60 range, the shares are trading at less than 12 times her EPS estimate of C$5.25, “at the low end of the historical pricing range. This makes it an “attractive entry point” for investors.

Meanwhile, Desjardins Securities analyst Keith Howlett lowered his target price to C$77 from C$80, though maintaining his buy rating. He says in a note that a 7% drop in same-store sales at the Mark’s Work Wearhouse division was a surprise. Mr. Howlett said:

Our concern is whether consumers have become as cautious about discretionary apparel purchases as US consumers, or whether Mark’s is losing market share to the likes of Wal-Mart (WMT), Sears (SHLD) and HBC.