Alimentation Couche-Tard Inc. (ATD.B)

By July 16, 2015 No Comments

In this week’s content analysis, we will be discussing the 4th quarter results of Alimentation Couche-Tard (ATD.B) which have also been updated yesterday in StockPointer. We will also be referencing to the July 14th article published in the Financial Post (link). Please note that ATD.B is currently held in our Canadian model portfolio since 2011.

Alimentation Couche-Tard reported a 10% decline in sales in this year’s Q4 compared to Q4 ‘14. The company still managed to produce higher operating profits of $254.6M compared to $168.8M. Net profit was affected by non-recurring costs associated with the acquisition of The Pantry Inc. Free cash flows have also increased by 31.5% in the past 12 months. This was mainly due to the management’s capacity to reduce the cost of goods sold.

As explained by the CFO, Raymond Pare, the acquisition of The Pantry Inc. temporarily reduced the return on capital (ROC). Even then, Couche-Tard still remains the Canadian company with the strongest performance in the consumer staples sector. Because of this ROC decrease, the intrinsic value calculated by StockPointer has slightly diminished from $52.61 to $48.54.  At July 14th closing price of $55, the P/IV ratio stands at 1.13, indicating the stock is currently trading at a premium. To better assess the company’s short term potential, we will show you how to use the intrinsic value calculator. To open this page, you need to click on the blue calculator tab located on the right of your EVA Executive Summary.  Download

By default, when we open the calculator, we see the detailed intrinsic value calculation based on projections automatically generated by our algorithm. The formulas in the model make sure that highly skewed data be re-adjusted and are designed so that all projections be as neutral and conservative as possible. In Couche-Tard’s case, the projected ROC of 16.31% seems low considering the recent acquisitions. From the last comments made by upper management, we can expect a higher ROC in the coming years, when these acquisitions will be fully integrated.

That being said, we can comfortably change the return on capital for 2016, 2017 and so forth to 17%, 17.5% and 18%, respectively. Couche-Tard’s upper management has also mentioned that they feel ready to make more acquisitions in a near future, thanks to their excellent financial situation. Hence, we added a capital investment representing 20% of the total invested capital (around $2B) for 2017 (please note that the projected year of a future acquisition does not influence the final result on a large scale).

After all the adjustments are incorporated in the calculator, the intrinsic value reaches $60.04, which reflects a potential capital gain of 10% based on yesterday’s closing price. This new target price is much more attractive and is still based on realistic projections. Not only does the calculator gives you more details on the projections, it also helps you evaluate different scenarios and shows you the impact they would have on the intrinsic value.