Canadian Tire: A Safe Haven for Investors?

Canadian Tire Corp. (CDNTF.PK) could be a safe investing haven in rocky economic times, according to UBS Investment Research.

In a note to clients, analyst Vishal Shreedhar said:

We believe Canadian Tire offers strong value and reasonably discounts challenging economic conditions.

While multiples, in terms of price to earnings or price to book ratios, are not at historical trough levels, Canadian Tire’s returns have steadily increased over time, which make historical trough levels less relevant. In this context we believe current risk/reward is favorable.

Per-share earnings in 2008 will be negatively impacted by significant incremental “future growth” expense of C$0.38 a share, Mr. Shreedhar added, which represents C$5 of share value, using normalized multiples. But those expenses are expected to stabilize in 2010.

He said:

Management refers to 2008/2009 as investment years and 2010 as a growth year. While 2010 seems far away, we believe consensus will increasingly begin valuing Canadian Tire on 2010 per share earnings.

Discretionary stocks in North America have rallied since  mid-July, and are up about 12% but Canadian Tire’s stock has not really participated in the rally and is up only 3.3%.

He noted that:

Despite an inexpensive valuation and a good long-term outlook. Given  expectations of improving financial performance, we believe current valuation represents an attractive entry point.

He rates the shares a buy with a price target of C$67.