On May 8, 2001, the Financial Post reported “The Street Turns Against Canadian Tire.” Canadian Tire Corporation, Ltd.’ s share price had risen by $ 0.75 to $ 24.90 on May 2, 2001, following a news release in which Wayne Sales, president and CEO at the time, said, “ We are pleased with our ability to deliver double digit growth...” Canadian Tire’s reported earnings of $ 0.37 per share exceeded analysts’ expectations.
The market soon learned, however, that reported earnings included an $ 8 million one- time gain on sale of certain Canadian Tire assets. Without this gain, earnings were $ 0.29 per share, 6% below earnings for the same quarter of 2000. Canadian Tire’s share price quickly fell back to $ 22.95.
The Post reported that “passing off” a one- time gain as part of operating earnings “didn’t fool or impress analysts” and is something they “hoped not to see again.”
a. Use efficient securities market theory to explain the rise in Canadian Tire’s share price on May 2, 2001, and the rapid subsequent fall in share price.
b. Was Canadian Tire correct in including the $ 8 million one- time gain in net income? Explain.
c. Evaluate the persistence of Canadian Tire’s reported net income of $ 0.37 per share (no calculations required). Does the fact that Mr. Sales ignored this item in his press release affect your evaluation? Explain why or why not.