Alimentation Couche-Tard (TSE: ATD) is a solid company that hit all-time highs earlier today. In times of turbulence, recession-resilient gas station & convenience store operators like Couche-Tard provide stability to portfolios. ATD has even expanded into EV charging stations recently because it is an innovator at heart. In this article, we go over some of Couche-Tard’s numbers to help investors decide what to do with the stock. While analysts are bullish still, we are leaning more toward “neutral” due to its valuation.
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How Alimentation Couche-Tard Creates Value for Shareholders
Great companies often have great management teams that can effectively allocate capital to profitable projects.
To get a good picture of management’s effectiveness, let’s take a look at the company’s numbers. A metric we like to look at is the economic spread, which is defined as follows:
Economic Spread = Return on Invested Capital – Weighted Average Cost of Capital
The idea is very simple; if a company’s return on invested capital is greater than the cost of that same capital, then the company is creating value for its shareholders through well-thought-out projects. Otherwise, the company is destroying value and would be better off simply investing money into risk-free bonds.
For Alimentation Couche-Tard, its return on invested capital has been pretty steady in the past five years, hovering around 13% to 14%. Currently, it is sitting at 13.9% on a trailing-12-months basis. Therefore, the economic spread calculation is as follows:
Economic Spread = 13.9% – 7.2%
Economic Spread = 6.7%
The positive 6.7% spread indicates that ATD is a value creator.
Alimentation Couche-Tard’s Valuation Seems Fair
There is still some value in ATD stock despite its recent rally. Currently, the company has earned US$2.28 billion in free cash flow in the past 12 months, and it is expected to earn US$2.38 billion and US$2.32 billion in Fiscal 2023 (ending April 2023) and Fiscal 2024, respectively.
If we assume that it will hit those targets in the next two years, its forward price-to-free-cash-flow multiples will be 19.9x and 20.4x, respectively. While this only implies a forward free cash flow yield of about 5%, we believe it is a fair valuation because the company has a history of successful growth through acquisitions and earnings beats, both of which are hard to factor into future estimates.
Indeed, Couche-Tard’s free cash flow compound annual growth rate (CAGR) for the past five years is 19.6%. So, while analysts expect its cash flow growth to stall for a bit, it’s likely that Couche-Tard will grow over time as it continues to acquire more businesses and expand its nascent EV charging business. Per-share earnings figures are likely to trend higher as well, as Couche-Tard has been reducing its share count recently through buybacks. It has a 3.9% buyback yield on a trailing-12-months basis.
Should Investors Buy or Sell Couche-Tard Stock Now?
Although ATD stock is near all-time highs, analysts are still bullish. Couche-Tard has a Strong Buy rating based on four Buys and one Hold assigned in the past three months. However, the average price target of C$63.80 only implies 7.2% upside potential. Therefore, analysts still believe there is some room for extra profits, but not much.
Conclusion: A Solid, Relatively Safe Long-Term Stock
Historically, Couche-Tard has been one of those stocks that you could buy and hold without any real worries due to its stability. It seems that this will not change in the near future. While ATD looks like an excellent pick for long-term investors seeking safe returns at a fair valuation, this isn’t our first choice because the recent market pullback has created many other opportunities in stocks that are well off their highs. Nonetheless, it is still a stock for the bulls to consider.
