Canadian Tire: Analysts Cut Price Targets on Disappointing Earnings

If you think Canadian Tire Corp.’s (CDNTF.PK) 7.5% decline on Thursday and 35% dip so far in 2008 presents a good buying opportunity, you might want to wait a little longer.

The retailer’s second quarter results came in below analyst estimates as a result of poor weather, inventory changes, higher expenses and slowing consumer spending. Its reduction in 2008 earnings guidance also came as a disappointment. On the bright side, same-store sales at Canadian Tire locations declined less than expected, down 0.5%, while Mark’s Work Wearhouse managed a gain of 0.9%.

But until macro economic conditions and same-store sales improve, investors should remain on the sidelines, Raymond James analyst Andy Nasr told clients. He cut his price target on the shares to C$55 from C$70 along with reductions to his 2008 and 2009 earnings per share [EPS] estimates, citing the company’s increased exposure and reliance on its financial services business.

Mr. Nasr said:

While Canadian Tire is a relatively defensive retailer, the company is not immune to a slowdown in retail spending and multiple contraction.

UBS analyst Vishal Shreedhar lowered his price target to C$67 from C$78 but noted that Canadian Tire’s valuation is very attractive at 10x forward EPS. He also values the company’s real estate at C$30 per share, which implied the operating businesses trade at less than 7x.

In a research note, Mr. Shreedhar said:

Notwithstanding, improvement in financial performance and/or the economic environment will likely be required to move the stock materially higher.

He added that when the economy does stabilize or its financial performance improves, Canadian Tire will rally quickly and significantly.

He also feels that the company’s core operating results in the quarter were better than they appear given several charges and expenses.

Despite the messy quarter, some analysts are far more bullish on Canadian Tire. Irene Nattel at RBC Capital Markets only cut her price target by C$2 to C$76, which represents upside of more than 55% to Thursday’s close.

Her 2008 earnings forecast was already below guidance, but the second quarter results has led to another reduction. And although 2009 should not be impacted, Ms. Nattel cut her forecast slightly nonetheless as a result of the weak economic outlook.

In a note, Keith Howlette at Desjardins Securites said:

The challenging retail environment coincides with a period in which Canadian Tire is spending heavily on initiatives such as its retail banking product pilots, the replacement of MasterCards with PayPass-enabled MasterCards, and numerous discrete information systems enhancements. 

He expects these items will reduce 2008 EPS by roughly C$0.45.

The analyst cut his price target to C$64 from C$77 and expects Canadian Tire to be range-bound during the next nine to 12 months.