Before the significant economic slowdown over the last few years due to the surging cost of living and rising interest rates, Canadian Tire (TSX:CTC.A) stock had ambitious plans for growth.
And while some of the growth has been delayed while Canadian Tire faces increasing macroeconomic headwinds, over the long haul, the well-known Canadian retailer continues to have attractive growth potential.
In recent quarters, Canadian Tire has been impacted by both a slowing economy and seasonal impacts, which can impact profitability from time to time, such as a warmer-than-expected winter, which we saw this year.
Nevertheless, with so much long-term growth potential and Canadian Tire still trading cheaply, now is the perfect opportunity for investors to take a long-term position in the stock while it’s still ultra-cheap.
So, if you’ve been watching Canadian Tire recently, wondering whether or not to pull the trigger, here’s how cheaply it trades today and what you can expect from the stock throughout the rest of 2024 and beyond.
Why is Canadian Tire stock trading so cheaply?
2023 was a down year for Canadian Tire. However, prior to that the stock was increasing both its sales and profitability at an impressive rate.
In fact, in the five years leading up to 2023, which included the pandemic, Canadian Tire’s revenue grew at a compounded annual growth rate (CAGR) of 5.8%. Meanwhile, its normalized earnings per share (EPS) increased at an impressive CAGR of 11.9%.
That’s strong growth for such a large and established stock through any five-year period, but especially through the pandemic when many of its retail stock peers saw their businesses being significantly impacted.
So, although 2023 was a tough year, with sales down over 6% and its normalized EPS cut almost in half (down 45%), one bad year doesn’t equate to Canadian Tire being an unreliable stock.
Furthermore, when you consider it wasn’t just a slowdown in the economy that impacted its operations but a combination of factors, it’s clear that Canadian Tire has the potential to bounce back and continue its long-term growth plan as the economy begins to recover.
Plus, with the stock impacted significantly due to the large decline in its normalized EPS, investors have the opportunity to buy Canadian Tire at an ultra-cheap valuation today and hold over the coming years as it recovers and continues to expand its operations.
What to expect from the ultra-popular retailer in 2024
Not only do analysts expect that Canadian Tire’s sales have already bottomed and will slightly increase in 2024, but the average analyst estimate for normalized EPS points to a 13% increase this year, signalling that the worst appears to be behind us.
Furthermore, with markets consistently looking forward to how Canadian Tire stock might trade in the future, by the end of 2024, the focus will already be on its potential in 2025. And right now, analysts expect more growth in revenue in 2025 and another 16% jump in normalized EPS next year to $13.64.
That means that should the economy continue to slowly improve and interest rates continue to be reduced, Canadian Tire could be set for a recovery rally over the coming months.
Right now, the stock is trading at just over 10 times its expected earnings in 2025, which is below its average forward price-to-earnings ratio over the last 10 years of 12.6 times.
Therefore, as the market starts to see some improvement, not only could estimates for its 2025 EPS increase, but so too could its valuation, pushing shares much higher than they trade today.
It’s also worth noting that Canadian Tire pays an annual dividend of $7 a share, which not only equates to a yield of more than 5% today but is also sustainable, considering that even in a down year in 2023, Canadian Tire still managed to earn normalized EPS of $10.37.
So not only does Canadian Tire have the potential to rally significantly as it recovers and the economy improves, but you can also earn an attractive yield holding the stock as you wait for its inevitable recovery, making it one of the top Canadian stocks to buy today.
