Tacticals

EVA Focus: Alimentation Couche-Tard (ATD/B)

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About

This week we will discuss what was once the largest position of the StockPointer® Canadian Strategy, Alimentation Couche-Tard (ATD/B). We bought ATD/B on March 31th, 2011 and since then, we trimmed the position three times because its weight exceeded 10% on that many occasions. The current weight of the position is 6.9% and is now the second largest behind Constellation Software with 7.6% weight.

As of today, the ATD/B position has an unrealized gain of 609%, a statistically significant portion of the value added generated by the strategy over the last seven years. However, the stock is consolidating its gains since 2016 in a range between C$50 and C$67 and has yet to resume its upward trend. Does ATD/B still got upside potential or did it run out of steam? You will find the answer below in our analysis.

Q4 2018 Earnings Release

On July 10th, ATD/B reported EPS of C$0.77 (vs. C$0.72 expected) on revenues of C$17.9B (vs. C$16.7B expected). Since last year’s acquisition of CST, the same store merchandise revenues grew both in the U.S. and in Canada.  The guidance remains positive and the CEO, Brian Hannasch, said the company is eyeing more acquisitions, specially in Asia as it seeks the right network to expand in that region. These results reignited the bullish sentiment as the stock rose as much as 12% after the announcement.

Competitive Advantage

The company is a gas station and convenience store operator with more than 12,000 locations across Canada, U.S., Europe and Asia. The stores operate under different brands such as Couche-Tard, Mac’s, Circle K and Kangaroo Express. Its massive footprint makes it the undisputed leader in a fragmented industry. Couche-Tard aims to take advantage of its moat by proceeding with other smart strategy acquisitions and looking to add cannabis products as a new opportunity for long term growth.

A Quality Company

Its SPscore of 70% remains the highest in the staples sector which shows the company is still one of the best value-added creators. The return on capital is high at 15.0% and increased steadily over the past five years except in 2017 due to its C$3.8B CST acquisition that increased the firm’s capital. The NOPAT has also been growing at an impressive pace of 18% per year in the past 5 years, slightly faster than its invested capital. As we said, growth was fueled both by internal growth and strategic acquisitions.

ATD/B’s accounting performance is also robust. The revenues and earnings per share grew at a fast pace of 10.3% and 20.7% CAGR respectively over the past 5 years as the company expanded its network. To reward its long-term investors, ATD/B increased its dividend, at an average rate of 24.6% per year. The dividend yield is projected to be 0.66% in the next 12 months, its highest level since 2013.

The payout ratio is low at 11% as the management got plenty of ideas to use its cash flows. Finally, its total debt to equity ratio is at 1.05, below the industry’s average of 1.55 which leaves room for a sizable acquisition. Finally, gross and net margins are under pressure since they peaked in late 2016. This coincides with the rapid and significant rise of oil prices, that shrank margins from gasoline sales. The last quarter shown improved fuel margins and merchandising comp, a ray of hope that margins may stabilize.

 

ATD/B Price vs. Gross Margins TTM and Net Margins TTM

Source: FactSet Research Systems

 

At A Reasonable Price

When it comes to valuation, the stock is currently trading well below its intrinsic value, at a 0.74 P/IV ratio, reflecting a potential upside of close to 35%. If the stock materializes this upside potential, we can expect the C$67 resistance of the trading range to be broken and the long-term uptrend to resume after a two-year hiatus. Moreover, the current discount is even more interesting considering that the stock hasn’t traded at this valuation level since 2014 which makes it an attractive entry point.

The Future Growth Value (FGV) of 1% tells us the enterprise value is almost equal to its operating value so there’s no discount according to that measure. The traditional ratios are giving mixed signals: the price-to-earnings is at 15.9 (vs. 27.10 for the industry) but the price-to-cash flow is at 10.6 (vs. 8.89 for the industry) suggesting some of the future growth is already baked in the current share price.

Conclusion

We think ATD/B remains attractive after the latest increase considering its price to intrinsic value valuation and our confidence in the management team to find the right acquisition in Asia. We expect store sales to gain momentum and looking forward margins to improve if crude oil prices stabilizes.

A great way to indirectly invest your client’s money in ATD/B along with other 24 quality Canadian companies is to purchase the Horizons Inovestor Canadian Equity ETF (INOC). The ETF is holding ATD/B since its inception. For more information about INOC, please click here to visit Horizons ETF website.