Warning: Things Could Get Ugly for This Auto Stock in 2019

AutoCanada Inc. (TSX:ACQ) stock has been pummeled as auto sales suffered year-over-year declines for most of 2018.

| More on:

AutoCanada (TSX:ACQ) is an Edmonton-based company that operates car dealerships across Canada. Shares were down 51.8% year over year as of close on January 9. The company has faced internal and external challenges that have the potential to push the stock into single digits this year.

Last year, I’d warned investors on several occasions to steer clear of AutoCanada. One of the primary reasons for this bearish outlook was the performance of auto sales in Canada. Numbers began to slip in the beginning of 2018 and worsened year over year in the final months of last year.

DesRosiers Automotive Consultants said 114,289 vehicles were sold in December in Canada compared to 124,247 in the prior year. This represented the 10th straight month of declines in 2018. Passenger cars suffered a 12.1% drop in sales year over year and light trucks reported a 6.5% drop. Total light vehicle sales in 2018 came in at 1.985 million, below the record 2.039 million sold in 2017.

DesRosiers said that economists should expect a further 2-4% decline in 2019. The consultancy firm emphasized that these numbers were still positive when taking long-term performance into account. Light truck sales, which have also powered worsening sales in the United States, rose 0.6% in 2018. Passenger car sales fell 9.7% year over year.

A new report from Scotiabank on auto sales in December also painted a bleak picture. The report said that vehicle sales fell by 7.4% month over month in seasonally adjusted annualized terms. “We forecast Canadian auto sales to dip to 1.93 million units sold in 2019 amid a continuation of the Bank of Canada’s tightening cycle and muted job gains with the economy sitting near full employment,” the report concluded. Scotiabank also projects that U.S. vehicle sales will fall below 17 million in 2019. This would be the lowest total since 2014.

AutoCanada is expected to release its fourth-quarter results in March. In the third quarter, the company saw revenue rise 3.9% year over year to $866.9 million. New and used vehicle sales increased 3.8% and 24.8%, respectively, compared to the prior year. The board of directors endorsed a Go Forward Plan in late 2018, which included commitments to enhance AutoCanada’s Finance and Insurance offerings at dealerships, the creation of a new specialty finance division, and the disposal of non-performing assets. AutoCanada will also introduce reforms to increase the sale of used vehicles at its locations across Canada.

The company forecast that it would be able to achieve materially better results due to its Go Forward Plan, even in the face of negative macro-economic factors. AutoCanada currently boasts a quarterly dividend of $0.10 per share, which represents a 3.6% yield. The stock last boasted an RSI of 54, indicating it is not oversold, even as it is trading only $3 from 52-week lows.

AutoCanada’s internal reforms have yielded positive results in the third quarter, but broader weakness in the industry will continue to weigh on its performance in 2019.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.

More on Investing

CI Financial goes private
Bank Stocks

CI Financial Wants to Go Private: What Investors Need to Know

Will the deal actually go through, or might it face government scrutiny?

Read more »

Canadian dollars are printed
Dividend Stocks

Transform Your TFSA Into a Cash-Generating Machine With Just $28,000

Canadians can turn their TFSAs into a cash-generating machine with money equivalent to four years’ contribution limits.

Read more »

Investor wonders if it's safe to buy stocks now
Tech Stocks

Balancing the Risks and Rewards of Investing in AI Stocks

Choosing a safe AI stock can be challenging if you need help understanding the underlying technology, business model, and, by…

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Retirement

Want the Maximum $1,346.60 CPP? Here’s the Income You Need

Most CPP users receive the average pension but have ways to boost their retirement income.

Read more »

open vault at bank
Bank Stocks

RBC vs. TD: Which Canadian Bank Stock Is the Better Buy?

Let's dive into whether Toronto-Dominion Bank (TSX:TD) or Royal Bank of Canada (TSX:RY) are the best picks in the banking…

Read more »

stock research, analyze data
Stocks for Beginners

Prediction: 2 Top Stock Picks to Beat the Market For Years to Come

Are you wondering what Canadian stocks could deliver predictable long-term returns? These two stocks are worth a bet for the…

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

Here’s the Average RRSP Balance at 45 in Canada

The RRSP is a strong tool for investors, but only if you invest in top stocks like this ETF for…

Read more »

Start line on the highway
Dividend Stocks

Retirement Planning: Dividends vs. Growth (Or How About Both?)

Building a healthy mix of income and growth potential in your retirement portfolio is essential. Even if you can't access…

Read more »