Earlier today, car dealership operator AutoCanada (TSE: ACQ) released its preliminary results for Q2 2022, which ended June 30, 2022. The company is experiencing fast top-line growth and modest earnings growth. Management anticipates year-over-year revenue growth of 32%, bringing revenue to about C$1.7 billion. Meanwhile, analysts expected C$1.47 billion. Nonetheless, the stock finished 1% lower.
Perhaps investors aren’t happy because net income is only expected to grow 3.7%, reaching C$39.1 million when including a C$10 million inventory writedown. Likewise, adjusted EBITDA is expected to come in at C$75.6 million, implying a 7.2% year-over-year increase.
ACQ’s Q2 earnings growth is relatively muted compared to its revenue growth of 32%. This implies that the company is not experiencing operating leverage and is seeing its profit margins fall.
Another thing that isn’t ideal is the company’s increasing debt load. Its net debt increased by C$45.1 million year-over-year to C$293.8 million. While debt can be good if used strategically, we are now in a rising-rates environment, so ACQ’s debt will come at a higher cost if it keeps issuing more.
Meanwhile, AutoCanada experienced same-store sales growth of 0.6% in the quarter. The company also mentioned that it has its eyes on potential acquisitions that can collectively increase annual revenue by over C$175 million.
ACQ’s full earnings results are to be released on August 10 after market close.
Investor Sentiment is Below the Sector Average
Investors who hold portfolios on TipRanks don’t appear optimistic about ACQ stock. Out of the 546,909 portfolios tracked by TipRanks, less than 0.1% hold the stock.
In addition, in the last 30 days, the number of TipRanks portfolios holding AutoCanada stock dropped by 1.0%. In the last seven days, this number dropped by 0.9%. As a result, the stock’s sentiment is below the sector average, as demonstrated in the following image:
Wall Street’s Take on AutoCanada
Turning to Wall Street, AutoCanada earns a Moderate Buy consensus rating based on one Buy and one Hold assigned in the past three months. The one Buy rating comes from Scotiabank (TSE: BNS) analyst Michael Doumet, who has a 4.6 star rating. Doumet is ranked #933 out of 20,942 overall experts tracked by TipRanks, which is respectable.
The average AutoCanada price target of C$38.50 implies 53.2% upside potential. Analyst price targets range from a low of C$37 to a high of C$40.
Conclusion: Preliminary Results Were Mixed, but There’s Upside Potential
AutoCanada’s preliminary results have their pros and cons. While revenue is growing quicker than expected, earnings and adjusted EBITDA are failing to keep up, growing by single-digit percentages. Meanwhile, the company’s net debt level is something to watch out for, as it makes up 44% of its market cap.
Nonetheless, analysts expect high upside potential, implying that the stock could be a bargain currently. However, it may be best to wait for new analyst ratings to come in, given the fresh preliminary results.
