Contents
Summary
- In my March 22 article I indicated I viewed the pullback in ATD’s stock price as a window of opportunity to acquire shares in ATD at a favorable valuation; I acquired another 500 shares for the FFJ Portfolio.
- That article was followed up with my July 10 article in which I made a similar recommendation.
- Strong Q1 results, aided by favorable weather conditions, have enabled ATD to generate strong free cash flow and to deleverage its balance sheet ahead of plan.
- ATD is well aware of the risks posed by reason of electric vehicles eventually replacing fuel powered vehicles and is using Norway as its ‘laboratory’ to determine how best to adapt.
- With over USD $51B in revenue for the fiscal year end April 29, 2018, a significantly larger US presence than in any other region of the world, and reporting in USD, I suspect ATD will list on a US exchange at some stage which will likely result in greater investor interest.
Alimentation Couche-Tard Inc. (TSX: ATD.a and ATD.b) reports its financial results in USD. Its stock, however, is traded on the TSX. Investors willing to purchase US shares over the counter should look at ANCUF. These shares, however, are very thinly traded.
ATD has Class A multiple-voting shares which are primarily held by insiders and which are very thinly traded. This article deals exclusively with the more commonly traded Class B subordinated voting shares.
ATD uses USD as its reporting currency since it provides more relevant information given the predominance of its operations in the United States. This article, therefore, reflects all figures in USD unless otherwise noted.
Introduction
In my March 22 article I indicated ATD is an exceptional operator in a fragmented industry and the pullback in its stock price presented a window of opportunity for investors to acquire shares at an attractive valuation. For the sake of full disclosure, I acquired an additional 500 non-voting class B shares on March 21 for the FFJ Portfolio bringing the total holdings to 553 shares.
At the close of business on July 9th, ATD released its Q4 and FY2018 results. On July 10th it held its analyst call to review its performance and I wrote another article in which I indicated I was of the opinion that:
- I fully expected ATD to focus on reducing its adjusted leverage ratio from 3.13:1 as at FYE2018;
- ATD would most likely continue to make bolt-on acquisitions versus making a large transformational acquisition until such time as its adjusted leverage ratio was reduced to a level closer to 2:1 (it stood at ~3.13 as at April 29, 2018).
I concluded that article with:
‘I would acquire additional shares at current prices but am satisfied with my current exposure of 553 shares, and therefore, do not intend to acquire any additional shares at this juncture.’
On September 5, ATD released its Q1 2019 results. I am, therefore, once again taking a quick look at ATD (ATD is currently trading ~$7 higher than at the time of my March 22 article) to determine whether it is still reasonably valued.
Q1 2019 Results
ATD’s Q1 results can be found here. ATD clearly had a great quarter and the integration/rebranding of the CST outlets is progressing according to plan.
Management indicated on its September 6 conference call with analysts that traffic trends have increased, the number of units /basket, and price increases have contributed to improved results. Favorable weather conditions in various regions also aided ATD.
In typical ATD fashion, strong positive cash flow was generated in Q1 despite in-store hourly-wage rate pressures resulting in higher expenses relative to historical levels. The Q1 Earnings Release indicates:
‘Growth in expenses was primarily driven by higher minimum wages in certain regions, higher expenses needed to support our organic growth, by the conversion of CODO stores into company-operated stores and by proportionally higher operational expenses in our recently built stores, as these stores generally have a larger footprint and higher sales than the average of our existing network. Excluding the impact of higher hourly wages, growth in our expenses is generally in line with inflation, as we continue to rigorously focus on controlling costs throughout our organization, while ensuring we maintain the quality of service we offer to our customers.’
The following describes the terms CODO and DODO which are frequently used by ATD’s management in all its presentations and conference calls.
CODO
Sites for which the real estate is controlled by Couche-Tard (through ownership or lease agreements) and for which the stores (and/or the service-stations) are operated by an independent operator in exchange for rent and to which Couche-Tard supplies road transportation fuel though supply contracts. Some of these sites are subject to a franchise agreement, licensing or other similar agreement under one of our main or secondary banners.
DODO
Sites controlled and operated by independent operators to which Couche-Tard supplies road transportation fuel through supply contracts. Some of these sites are subject to a franchise agreement, licensing or other similar agreement under one of our main or secondary banners.
Tight cost control has resulted in ATD generating strong free cash flow. This has enabled ATD to accelerate its deleveraging plan; the interest bearing debt level was reduced by ~$0.5263B to $7.842.8B within one quarter. The adjusted leverage ratio as at the end of Q1 stood at 2.86:1 versus ~3:13 as at April 30.
Norwegian ‘Laboratory’
The move from fuel to electric powered vehicles is a potential risk to ATD’s business. Judging from its initiative in Norway, it is clearly apparent that ATD is well aware that it will need to adapt.
Regretfully, the size of ATD's January 2018 Investor Day Presentation (no longer provided on the company's website) is so large that I can not upload the entire presentation. In order to upload the entire presentation I would need to create multiple smaller files. I am able, however, to provide the section that focuses exclusively on ATD’s initiative in Norway.
ATD Investor Day Presentation January 2018 (pages 118 - 129)
Credit Ratings
There has been no change from the ratings reflected in my July 10 article.
Source: ATD – Investor Presentation – July 2018
Valuation
When I wrote my July 10th article, the consensus estimate from 13 analysts called for FY2019 adjusted diluted net EPS of ~$3.05. ATD was trading at CDN $60.80 or USD $46.41 which resulted in a forward adjusted PE ratio of ~15.2 ($46.41 / $3.05).
ATD is now trading at CDN $66.07 or USD $50.10. The consensus estimate from 13 analysts for FY2019 adjusted diluted net EPS is now $3.10 which results in a forward adjusted PE ratio of ~16.2 ($50.10/$3.10).
In my opinion, the recent surge in ATD’s stock price has now resulted in ATD being fairly valued as opposed to being attractively valued when I wrote my two previous articles.
Dividends
Other than a reduction in the dividend yield to ~0.6% from 0.66% (the dividend yield as at July 10th article), my dividend related comments remain unchanged. ATD’s management currently views the reinvestment of earnings to finance the company’s growth as offering the greatest potential shareholder return, and therefore, dividend yield hungry investors will likely find ATD to have little appeal.
I do not envision any significant change to ATD’s dividend policy in the foreseeable future.
Final Thoughts
I continue to be impressed with ATD and despite the recent run-up in its stock price I view it as fairly valued given its long-term growth prospects.
I continue to be surprised that it has not yet listed on a US stock exchange given that it reports in USD and it has in excess of 10,000 stores in North America of which the vast majority are in the US.
This is a company which has grown significantly through acquisition. Growth in this manor presents risks but ATD seems to have its integration process down to a science in that it does not take long for it to generate synergies which, in turn, generate strong free cash flow for debt reduction purposes.
ATD is slightly ahead of schedule on its debt reduction plans as noted at the end of the Q1 2019 Results section of this article. The favorable weather conditions certainly helped ATD in Q1 and if conditions continue to be favorable over the next few quarters, I envision ATD reducing its leverage to a level where it may look to make another major acquisition in late FY2019/early FY2020.
I already have a full position and will not be acquiring further ATD shares at this juncture. Were I not in this position I would acquire shares despite the recent run-up in its stock price.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected]
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long ATD.b.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
