April 10, 2018
Good Afternoon All!
Today I write to you regarding one of Canada’s market darlings.
There are few Canadian companies who have grown their earnings ten-fold (26% CAGR) over the last ten years. Here’s an exhaustive list of the companies we know that have managed to do that:
- Constellation Software
- CCL Industries
That’s it. If you know of others, please let me know.
EDIT: I somehow forgot Tucows when this was first written, and I wasn’t fond of Boyd at the time.
Well there is one other that has come close: Alimentation Couche-Tard (ATD.B), only increasing earnings nine times over the last decade.
The Winking Owl
For my fellow Western Canadians, you’re probably familiar with ATD’s winking-owl subsidiary, Mac’s. But ATD owns convenience stores around the globe, including their new “global” brand initiative, Circle K (coming soon to a convenience store near you).
Since I first started investing, I’ve been well aware that they run an exceptional business, but my reluctance to buy them has been for ethical reasons more than anything; 40% of their sales are driven by tobacco. But I’ve been reading a lot of Buffett lately, and he’s helped me reconcile this:
Charlie and I went to Memphis to look at a chewing tobacco company. In the end, we decided we didn’t want to own it. We would buy stock in a tobacco company, but we didn’t want to own it.
A good example is Charlie’s favorite company, Costco. They are the #3 distributor in the US of cigarettes, but you wouldn’t avoid buying it because of that. You’ll drive yourself crazy trying to keep track of these things. Our philosophy is that it’s impossible to grade marketable securities, but we’ll buy the stocks without any problems, but we just won’t be in certain businesses.
Fair enough Warren, fair enough. After all, I do love their slurpees.
The VERY Lucrative Winking Owl
So what makes ATD such a good business anyways? Buffett even bought his own look-alike last year, a company called Flying J. There must be something worth looking at here.
This weekend I watched a documentary called Becoming Warren Buffett (which I highly recommend). In this, he gave an example of Coca-Cola, from which he made a very large portion of his fortune. To paraphrase, he said if Coca-Cola were to increase the price of their Coca-Cola by 1 PENNY per serving, company owners would collectively pocket an extra $7.3 BILLION in 2014.
You can’t help but think that the convenience store business is very similar. Now, what differentiates convenience stores from grocery stores? It’s exactly that: convenience. Sure location does matter to some extent for grocery stores, but people will drive great distances for cheaper groceries (think Costco). If people need gas, they have no choice but to go to the nearest convenience store.
ATD in particular is known for its practice of aggressively pricing their low-margin gasoline to draw in customers and then hope they buy their high-margin snacks.
Now not all of ATD’s stores are like this, and perhaps not even all Mac’s, but the ones I have been in are especially pleasant, as opposed to your everyday, grungy 7-11 or Shell. Mac’s just scream “treat yourself!” And I usually do.
Finally, ATD has a long history of making very accretive acquisitions, which has enabled its rapid growth. This has also fueled their dividend growth of 21.5% CAGR over the last ten years. They’ve recently taken longer than expected to digest their largest acquistion, CST Brands, which has weighed on their share price, but I have no doubt that they will bounce back to make many more acquisitions.
A Wonderful Company for a Fair Price
Now recently, I have been watching ATD’s share price, and I can’t believe my eyes. In the two years that I’ve been busy “introspecting,” the market has lost its collective mind. ATD’s earnings have since increased 25% (2017 vs. 2015), and yet the market hasn’t rewarded them a penny. It hasn’t traded below this P/E for 7 years, as it was emerging from the recession!
I guess their growth wasn’t enough for analysts, with the recent hurricanes and increasing fuel prices leading to “underperformance.” There is also a fear of electric vehicles. Oh, what ever will they do?
Charging stations seem like an appropriate response to me. Indeed they have been rapidly adding these, particularly in Europe. There are some concerns that people will make an asserted effort to charge their vehicles at home since it is not uncommon for a charging station fill-up to take half an hour.
ATD’s response has been to explore dining solutions that cater to extended visits. My response is, humans will still continue to drink slurpees and consume whatever other snacks their hearts desire.
Now, a Motley Fool writer claims that their average 10-year normal P/E is ~17.1. I am assuming “normal” implies earnings excluding unusual circumstances (i.e. last year’s tax initiative from Trump), but if not, it seems like a rather conservative calculation. An average from Morningstar’s database shows a ten-year average of ~18.5.
Regardless, ATD.B is currently trading at 16x last year’s earnings, reflecting a reasonable discount and definitely a fair price.
An investor would certainly be content holding this company for the next decade, and if you intend to drink your fair share of slurpees this summer (as I do), an investment in ATD should help finance this extravagance 😉
As always, please reach out to me for discussion at any time!
Cheers,
Zach
“We make a living by what we get. We make a life by what we give.”
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