Alimentation Couche-Tard Inc.
This graph clearly illustrates why Alimentation Couche-Tard has been such a fantastic investment. Earnings per share on this graph have risen by a compounded average of 21% per year for the ten years shown which is incredible growth.
The graph of the revenue per share growth for Couche-Tard (red line) shows strong growth but with periodic flatness or declines mostly due to fluctuating gasoline prices and due to significant declines in fuel volumes with the pandemic in fiscal 2021. We use today’s exchange rate to translate all past reports in U.S. dollars to Canadian dollars. (In effect the graph then reflects earnings growth in U.S dollars, which is the currency it reports in.)
| Alimentation Couche-Tard Inc., ATD.B | |
| RESEARCH SUMMARY | |
| Report Author(s): | InvestorsFriend Inc. Analyst(s) |
| Author(s)’ disclosure of share ownership: | Author(s) hold shares |
| Based on financials from: | Apr ’23 Y.E. + Q1 ’24 |
| Last updated: | October 11, 2023 |
| Share Price At Date of Last Update: | $ 74.34 |
| Currency: | $ Canadian (translated from reported U.S. figures all at the exchange rate on the date of this report) |
| Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): | Buy rated at $74.34 |
| Qualifies as a stock that could be bought with confidence to hold for 20 years? | Yes |
| Has Wonderful Economics? | Yes |
| Has Excellent and Trustworthy Management? | Yes! |
| Likely to grow earnings per share at an attractive rate over the next decade? | Yes |
| Positive near-term earnings outlook? | Probably, yes |
| Valuation? | Attractive |
| SUMMARY AND RATING: This summary cell attempts to summarize the information in many other cells of this report. Based on the graph and what we know of the longer history, this definitely qualifies as a great company, exhibiting very strong earnings per share growth. Revenue per share sometimes declines due to lower gasoline prices but this has little or no impact on the profit. Book value per share has grown rapidly and steadily – and that’s despite substantial share buybacks. Given the steady historic growth this seems to be a company where we can predict continued long term growth with some confidence. But Electric Vehicles will impact growth at some point and could cause many neighbourhood gasoline stations to close as people will charge their cars mostly at home. And the recent very high gasoline margins may be unsustainable which could lead to a decline in profits in the short term although they have stayed very high for about three years and so this may be the new normal level. There are risks including restrictions on tobacco and vaping products, volatile fuel margins and the eventual move to electric vehicles. Higher interest rates are also a headwind but the company appears to have astutely moved to mostly lock in its interest rates. The economics of the business seem excellent as evidenced by the recent 24% ROE which has been sustained at about that level for many years. Overall the value ratios in isolation indicate a rating of (higher) Buy to Strong Buy. The recent earnings trend has been very strong. We have a very high opinion of management. Gasoline margins have been unusually high and could decline. And governments are looking into gasoline profit margins in light of the very high prices. The insider trading signal is neutral to moderately negative while the substantial insider holdings are a positive indicator. The company has been buying back shares aggressively which is a sign of confidence. Their large size and entrepreneurial culture are competitive advantages. It does reasonably well on the Buffett tenets and seems to be the type of business that Buffett would like to buy (Couch-Tard uses Berkshire’s McLeans as a wholesale / delivery vendor in parts of the U.S.). Note also there is currency risk since most sales are in U.S. dollars. A lower (higher) Canadian dollar lowers (increases) the reported earnings in U.S. dollars but paradoxically should increase (decrease) the value in Canadian dollars. Overall, we rate this a Buy at CAN $67.95. | |
| MACRO ENVIRONMENT: With almost record low unemployment, people are on the go and so the macro environment is good. A possible / probable recession is likely to be only a mild headwind. | |
| LONG TERM VALUE CREATION: This company has been an enormous creator of value. For every $1 of investor equity capital that it holds it has turned that into $83 of market value. | |
| DESCRIPTION OF BUSINESS: (Updated as of October 9, 2022). A VERY large convenience store/gas station operator. It was founded in and is still based in Quebec but operates globally. In total in North America and Europe (mainly the Scandinavian countries plus, Ireland, Poland and the Balkans and a small presence in Russia) plus Hong Kong. It owns and operates 9,879 sites, the great majority of which are convenience stores with “gas stations” (about 1000 of these in Europe are unmanned automated fuel stations) while about 1300 in North America are stand-alone convenience stores, and it has another 2,488 franchise or dealer owned sites for a total of 12,367 sites. In addition to that are 1935 sites in Asia and Mexico licensed to use the Circle K brand name. Its network employs about 96,000 workers in North America and 26,000 in Europe. Geographically (April 2022 fiscal year end) , over two-thirds (68%) of revenues are from the U.S., 19% from Europe (and other regions) and just 13% from Canada. They own the land at 55% of the 9,976 company or dealer operated sites and the building at 66% of these sites while the remaining land and buildings are leased. The company indicates that it is on a journey to become the world’s preferred destination for convenience and fuel. | |
| ECONOMICS OF THE BUSINESS: Updated April 2023. Gross margins overall are about 16%. Due to the gasoline sales this is a relatively low net margin (on sales) business. However, large throughput (high sales per dollar of assets) as well as use of debt leverage allows the ROE to be very attractive at 24%. It appears that the huge scale of the business allows it to be highly profitable despite sometimes stiff competition. And, for the past three years competition appears to be far less intense as gasoline margins soared. The company’s profits appear to be the result of superior management skills including a decentralized structure. Relentless and significant acquisitions have been the main driver of profit growth over the years. The company has amply demonstrated that the economics of its business are very attractive. | |
| RISKS: Gasoline margins have moved up very substantially in the past three years and have stayed high. There is a risk that competition could force them down. Highly leveraged operationally in that a small decline in revenues due to competition can have a very large impact on earnings. In this regard it is currently facing wage pressures. Possible environmental risks associated with gasoline tanks. As of fiscal 2022, 39% of merchandise/service sales were from cigarettes / tobacco and tobacco alternatives (and are at risk due to pressures against smoking). This represented 21% of gross profit. The company indicates that liabilities from its house-brand cigarettes are a possibility. The company notes electric vehicles as a possible risk. EVs could be a major risk causing many gas stations to close within about five years as people charge at home. See annual report for additional risks. | |
| INSIDER TRADING / INSIDER HOLDING: Checking from October 1, 2022 to October 11, 2023: Many insiders buy automatically “under a plan”. There were a couple of insiders buying. The CEO exercised options and sold a total of 888,000 shares which a negative signal. The four founders are now at a stage when they are engaging in charitable contributions by selling shares and so this is not necessarily a negative when it occurs. There may be reasons to do this associated with estate planning. Overall the insider trading signal is neutral to moderately negative. There is substantial (actually, staggeringly large) insider holdings with the four founders holding millions of shares. Insiders also hold substantial options. The insider holding is a positive indicator. | |
| WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is simple to understand (pass), has favorable long-term economics due to cost advantages or superior brand power (pass based on significant scale and entrepreneurial decentralized structure), apparently able and trustworthy management (pass), a sensible price – below its intrinsic value (pass), Other criteria that have been attributed to Buffett include: a low debt ratio (pass), good recent profit history (pass) little chance of permanent loss of capital (pass although the conversion to electric vehicles is a definite concern) a low level of maintenance type capital spending required to maintain existing operations excluding growth (marginal pass since stores need upgrades periodically) | |
| MOST RECENT EARNINGS AND SALES TREND: Adjusted earnings per share growth in the past four quarters, starting with the most recent (which was its Q1, fiscal 2024 ended July 23, 2023), has been unchanged, up 29%, up 5%, and up 27% (Changing margins on gasoline/fuel sales contribute to volatility). In the same past four quarters revenues per share have been down 12% (due to lower fuel prices) up 5%, up 14%, and 24%. Changing gasoline / fuel market prices contribute to volatility in revenues which does not necessarily impact profit very much. Fiscal 2023 ended April 30, 2023 had adjusted earnings per share up 20% while revenues per share were also up 20%. Fiscal 2022 ended April 24, 2022 had adjusted earnings per share up 6% while revenues per share were up 43% (a combination that demonstrates the disconnect between revenues and profits here as fuel prices change). Fiscal 2021 ended April 25, 2021 had adjusted earnings per share up 24% while revenues per share were down 14% (a combination that is quite remarkable). Fiscal 2020 ended April 26, 2020 had adjusted earnings per share up 21% while revenues per share were down 8%. Fiscal 2019 ended April 28, 2019 had adjusted earnings per share up 27% while revenues per share were up 15%. The recent earnings growth trend is very strong driven by continued unusually high fuel margins (in part the higher margins are due to better fuel purchase strategies and may or may not be sustainable but they have now persisted for quite some time). The latest quarter however had flat earnings. | |
| COMPARABLE STORE SALES: Same-store merchandise sales in the past four quarters starting with the most recent (Q1 ended July 23, 2023) Canada up 6.4%, U.S. up 2.1%, Europe up 2.7%, Q4 was Canada up 5.9%, U.S. up 3.3%, Europe up 3.0%, Q3 was Canada up 2.3%, U.S. up 4.8%, Europe and other 3.5%. In Q2 was down 1.5% in Canada, up 5.6% in the U.S., and up 2.9% in Europe and other GASOLINE MARGINS: U.S. gasoline margins in the same past four quarters, net of payment card fees, Q1 increases 3% and Q4 decreased 2% (but remained quite high) Q3 increased 20%, Q2 increased 38% – For about three years or more they have been at unusually high levels compared to historic which they indicate is partly due to wholesale purchase and futures trading strategies. This may or may not be sustainable but has now persisted for some time. Possibly the usual intense competition in fuel prices has abated for some structural reason such as consolidation in the industry and increasing brand power of the largest players “fueled” by loyalty programs. Or is it quiet collusion? And possibly the smaller players are getting eliminated as they can’t afford to update their gasoline pumps for the latest credit card technology including tap to pay. | |
| Earnings Growth Scenario and Justifiable P/E: The Dividend pay-out ratio here is only about 13%. We note that a company with a 14% dividend payout ratio and 10% growth for ten years, followed by much lower growth at 4% and a 50% dividend pay out ratio can theoretically or arguably justify a P/E of 27 by our calculations. With a P/E of 17, the stock is pricing in earnings per share growth of about 6% to 7% annually for the next ten years which does not seem excessive.. | |
| VALUE RATIOS: Analysed at CANADIAN $74. The price to book value ratio is, in isolation, unattractively somewhat high at 4.0. But this is not extremely high and mathematically, this corresponds to the very high ROE and is a testament to the high earnings of this company. We would not place much weight on this ratio. But note, too that about 30% of the assets consist of purchased goodwill and the equivalent. The dividend yield is minimal at 0.8% due to the low earnings pay-out ratio at just 13% and despite large increases to the dividend. Adjusted earnings P/E is, in isolation, reasonably attractive at 17.4 (and perhaps quite attractive indeed given the growth history) The ROE is very attractive and impressive at a recent 24% and it has been around that high level many years (several decades!) . Growth in revenues per share was historically very high but can be volatile with gasoline prices. Adjusted earnings per share growth in the past five fiscal years averaged a very impressive 19% and growth has been steady but it did decline 1% to 2% in the Summer and Fall of 2021 before rebounding sharply. We calculate intrinsic value as $64 to $91 based on growth in earnings per share of 6% to 10% annually, combined with a terminal P/E of 15 or 18 in five years and using a required rate of return of 7.0%. In isolation these ratios would suggest a rating of (higher) Buy to Strong Buy. | |
| TAXATION FOR INVESTORS: Nothing unusual. Given the small dividend, the expectation here is that most of the return will continue to be in the form of capital gains. | |
| SUPPORTING RESEARCH AND ANALYSIS | |
| Symbol and Exchange: | ATD, Toronto |
| Currency: | $ Canadian (translated from reported U.S. figures all at the exchange rate on the date of this report) |
| Contact: | investor.relations@couche-tard.com |
| Web-site: | www.couche-tard.com |
| INCOME AND PRICE / EARNINGS RATIO ANALYSIS | |
| Latest four quarters annual sales $ millions: | $94,019.4 |
| Latest four quarters annual earnings $ millions: | $4,170.2 |
| P/E ratio based on latest four quarters earnings: | 17.8 |
| Latest four quarters annual earnings, adjusted, $ millions: | $4,255.5 |
| BASIS OR SOURCE OF ADJUSTED EARNINGS: Adjusted for various unusual items identified by management. | |
| Quality of Earnings Measurement and Persistence: Probably reliable, but could be volatile depending on competition levels regarding gasoline margins. Measurement quality is lowered by the extensive investments in store renovations. Also future expenses for removing underground gasoline tanks are estimated which lowers earnings quality. Currency fluctuations also affect earnings. Overall, the earnings quality seems to be very good as evidenced by past success in paying down debt rapidly after each major acquisition. | |
| P/E ratio based on latest four quarters earnings, adjusted | 17.4 |
| Latest fiscal year annual earnings: | $4,222.5 |
| P/E ratio based on latest fiscal year earnings: | 17.6 |
| Fiscal earnings adjusted: | $4,302.8 |
| P/E ratio for fiscal earnings adjusted: | 17.3 |
| Latest four quarters profit as percent of sales | 4.5% |
| Dividend Yield: | 0.8% |
| Price / Sales Ratio | 0.79 |
| BALANCE SHEET ITEMS | |
| Price to (diluted) book value ratio: | 4.01 |
| Balance Sheet: (Last updated Q4, fiscal ’21) The composition of assets is as follows: 38% of assets are property and equipment, (which is composed relatively evenly of land, buildings and equipment) 14% of assets are current assets (mostly accounts receivable, and inventory) 11% is cash, 22% of assets are purchased goodwill and similar intangibles, 115 is capitalised leases, 2% is software and the remaining 2% is other assets including deferred expenses. These assets are supported 43% by equity, 23% by debt, 16% by current liabilities (largely accounts payable), 11% by capitalized lease liabilities, 4% by deferred income tax and 4% other liabilities. The equity is largely retained earnings which demonstrates a history of profitability. With debt at just 52% of the book equity value and with the market value of equity being 3.4 times higher than book value, this is a strong balance sheet. | |
| Quality of Net Assets and Book Value Measurement: Somewhat lower quality due to existence of goodwill and purchased intangibles which together represent about 30% of assets. However, it seems clear that the goodwill is worth far more than the balance sheet amount. In any event the shares are valued for the earnings not the assets. | |
| Number of Diluted common shares in millions: | 980.0 |
| Controlling Shareholder: Controlled by the main founder and long-time former CEO who is now executive Chairman. Three other founders, one of whom is still an executive also own large stakes. The four founders used to control 68% of the votes mostly through multiple vote shares. But their voting interest declined to 23% when the two share classes merged in December 2021. | |
| Market Equity Capitalization (Value) $ millions: | $72,853.2 |
| Percentage of assets supported by common equity: (remainder is debt or other liabilities) | 43.8% |
| Interest-bearing debt as a percentage of common equity | 48% |
| Current assets / current liabilities: | 1.2 |
| Liquidity and capital structure: Strong liquidity with manageable debt. At last check, it has only a BBB credit rating (from S&P) however its relatively low borrowing costs are a testament to its financial strength. | |
| RETURN ON EQUITY AND ON MARKET VALUE | |
| Latest four quarters adjusted (if applicable) net income return on average equity: | 24.2% |
| Latest fiscal year adjusted (if applicable) net income return on average equity: | 25.2% |
| Adjusted (if applicable) latest four quarters return on market capitalization: | 5.8% |
| GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE | |
| 5 years compounded growth in sales/share | 9.4% |
| Volatility of sales growth per share: | Strong steady growth |
| 5 Years compounded growth in earnings/share | 15.7% |
| 5 years compounded growth in adjusted earnings per share | 19.1% |
| Volatility of earnings growth: | strong steady growth |
| Projected current year earnings $millions: | not available |
| Management projected price to earnings ratio: | not available |
| Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in (adjusted) earnings per share? | Yes |
| Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: | 21.9% |
| More conservative estimate of compounded growth in earnings per share over the forecast period: | 6.0% |
| More optimistic estimate of compounded growth in earnings per share over the forecast period: | 10.0% |
| OUTLOOK AND AMBITIONS FOR BUSINESS: Gasoline margins could drop significantly from their current elevated levels. On the other hand the company has plans to continue to improve operations and is also buying back shares which increases earnings per share. It’s probably reasonable to expect strong but more modest growth in the next year. The current quarter may not show much growth but either way growth is likely to be reasonably strong thereafter. The pending large acquisition in Europe will boost earnings per share starting around the end of 2023. | |
| LONG TERM PREDICTABILITY: The company has steadily increased its earnings per share and it seems reasonable to forecast that earnings per share will continue to increase over the years but there are some threats to that. Increasing pressure against smoking and vaping will hurt sales at some point. Cigarette and vaping sales are a significant component of merchandise revenues (42% of such revenues in fiscal 2020) , so a drop in cigarette and/or vaping sales and the traffic it generates could be quite damaging. E-cigarettes / vaping have recently more than offset declines in cigarettes. In the Q1 2024 conference call the CFO noted tobacco sales declines are accelerating. The company hopes that it will someday be able to sell beer and liquor in its Ontario stores. The Company hopes to reduce credit card fees but so far governments have taken little action on this. Electric cars are a medium and long-term threat since these cars will mostly be charged at home and since charging stations are not restricted to “gas stations”. During the pandemic it was surprising how its merchandise sales held up but it would still lose the fuel margins if many people are driving electric cars. Many gas stations could close if EV vehicles continue to increase sales but it is possible that those lands can be sold for strong gains. The company has just released an ambitious plan for strong growth in the five years ending April 2028. | |
| Estimated present value per share: We calculate $64 if adjusted earnings per share grow for 5 years at the more (possibly very) conservative rate of 6% and the shares can then be sold at a reduced P/E of 15 and $91 if earnings per share grow at 10% for 5 years and the shares can then be sold at a very moderately higher P/E of 18. All estimates use a 7.0% required rate of return. | |
| ADDITIONAL COMMENTS | |
| INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition. Limited barriers to entry based on scale and brand name (marginal pass). Some possible issues with powerful suppliers in terms of fuel suppliers and credit card companies although its huge size may mitigate that (marginal pass). No issues with dependence on powerful customers (pass), Little potential for substitute products in that gas stations and with attached convenience stores are unlikely to be displaced although electric cars are an eventual threat (marginal pass) some past tendency to compete hard on prices but high margins suggest they do not have to compete extremely hard on price (pass). Overall this industry appears to be attractive for a large incumbent (Although it has in fact been very attractive for Couche-Tard). | |
| COMPETITIVE ADVANTAGE: Superior management and a hunger for growth appears to be an advantage. Scale and specialization. Existing stable of attractive locations. The entrepreneurial de-centralized structure and culture appears to be a real strength and allows them to integrate purchased stores quickly. | |
| COMPETITIVE POSITION: The largest convenience store operator in Canada. In the U.S. we understand it is the largest independent in terms of the number of company-owned stores. Has a leading market share in Scandinavia and Ireland and the Baltics (Estonia, Latvia and Lithuania) and a presence in Poland. Now has a large presence in Hong Kong. In addition, it has licensed its brand name in a number of other mostly Asian countries plus Mexico. | |
| RECENT EVENTS: On March 16, 2023 they announced their latest huge acquisition as they will buy for cash the retail network of TotalEnergie consisting of 2193 sites in Germany, the Netherlands Belgium and Luxemburg. They acquired 218 sites in Atlantic Canada in August 2022 (Wilsons and Esso Go stores) but they later had to divest 52 stores. They continue to buy back shares aggressively though they do pause at times. The share count is down by about 5% in the past year and 9% in the past two years. The company continues to invest in speedy check-out systems and to innovate. They continue to offer better fresher food. They introduced a $10 per month beverage a day subscription offering and are innovating in the loyalty and data area. On May 20, 2022 Couche-Tard announced that its first Electric Vehicle fast charging station in the U.S. was operational in South Carolina and that it will have 200 installed by 2024. This is a very slow roll-out considering the company has 9000 locations in the U.S. But they are experienced with 1085 chargers in Europe where they also supply home chargers. The company fared extremely well during the pandemic due to high gasoline margins and surprisingly strong gains in merchandise sales despite significantly lower fuel volumes. | |
| ACCOUNTING AND DISCLOSURE ISSUES: Overall the disclosure seems detailed and clear. The company reports in U.S. currency since the majority of its stores are in the U.S. However, it has substantial Canadian and European operations as well. The company books liabilities for future removal of underground gasoline tanks and related clean-up. It charges a portion of this as a non-cash expense each year. The amount is estimated which impacts the reliability of earnings. It excludes certain restructuring and acquisition expenses and other unusual expenses AND gains to arrive at adjusted earnings. Their approach looks reasonable and perhaps conservative. | |
| COMMON SHARE STRUCTURE USED: Normal, 1 vote per share. | |
| MANAGEMENT QUALITY: Management has a very (very) strong track record. We have a very favorable opinion of management. They have bought back very substantial amounts of shares at what have proven to be attractive prices. And they continued to buy back shares at opportune times including at good prices in 2011. The repurchase of 4.4 million shares (0.7% of outstanding shares) from Metro in late 2017 at $28.59 (split-adjusted) also proved to have been a wise move. They have shown the discipline not to over-pay for acquisitions. They continue to set ambitious goals and, as they say, they play to win. | |
| Capital Allocation Skills: As a company that has made strong earnings and retained the vast majority of earnings over the years, capital allocation skills are crucial. This management has demonstrated outstanding capital allocation skills. Its many acquisitions have been highly beneficial on a per share basis. It pays just a small dividend and retains most of its earnings which has proved to be very advantageous. It has bought back shares at good prices. | |
| EXECUTIVE COMPENSATION: With the CEO receiving $12.8 million and the founder and executive chairman $6.3 million, (2021 circular) compensation is generous but not of real concern given the size and success of the company. Amounts for the other three named officers were at $2.1 million to $3.0 million. | |
| BOARD OF DIRECTORS: (Updated as of the September 2021 report) 15 members, one is the main founder who is now executive chairman, three are retired co-founders. These four are (very) major shareholders. The CEO is also on the Board. The daughter of the founder a CPA and an executive at the company is also on the board. The remaining 9 own at least a moderate number of shares and in most cases several million dollars worth. Although this Board does not best fit today’s notions of good governance, we like it because the owners are minding the shop. | |
| Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry. | |
| DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice. | |
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