Alimentation Couche-Tard (TSX: ATD.b) is the 2nd largest participant in the highly fragmented convenience store industry behind Japan's Seven & I Holdings Co. (7-Eleven chain).

ATD is consistently profitable, generates strong Free Cash Flow, and intends to double in size within the next 5 years.

ATD will appeal to investors seeking growth versus dividend income.

Alimentation Couche-Tard Inc. 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.

In the ‘Final Thoughts’ section of my July 10^th Alimentation Couche-Tard Inc.  (TSX: ATD.a and ATD.b) article I suggested investors would be wise to practice a little patience since shares were richly valued.

At the time of that article, shares were trading at CDN $85.81 or USD $65.70 (CDN $42.905 or USD $32.85 following the 2 for 1 stock split in September).

Fast forward to the October 24^th market close and the share price has retraced to CDN $39.08 or USD $29.90.

Readers unfamiliar with ATD may wish to access the September 18^th AGM presentation and the more comprehensive October 2019 Investor Presentation.

ATD operates in a highly fragmented industry and we see from the 2019 top convenience store ranking that ATD is the second largest industry participant. I provide the actual sites below in the event you click on the previous link and are instructed to update your browser. Just copy and paste them and you will not get the same ‘browser update’ message.

https://www.cspdailynews.com/top-202-convenience-stores-2019

https://www.cspdailynews.com/top-202-convenience-stores-2019/alimentation-couche-tard-inc

If you look at the rankings on an annual basis starting with 2014, the earliest year within the database, you will notice several changes in ranking over the years. You will also notice that 7-Eleven Inc. and ATD have remained #1 and #2 and that the gap in the number of stores has narrowed from 2014 to 2019; the number of 7-Eleven stores has increased 1,410 while the number of ATD stores has increased 2,689.

More comprehensive data on ATD’s global operations can be found in its Annual Reports. For ease of reference you may wish to look at page 13 of 83 from ATD’s 2014 Annual Report and page 4 of 112 in ATD’s 2019 Annual Report. Impressive growth….AND ATD intends to double in size within 5 years!

While doubling in size is impressive, what is more impressive is that ATD increases Free Cash Flow and profitability. Top line growth without growth in key profitability metrics is merely growth for the sake of growth.

While some may question whether doubling in size within 5 years is a realistic target I am confident this is achievable. The convenience-store industry broke the profit barrier for the 3^rd time in the past five years in 2018, hitting $11B and total sales rising for the 3^rd year in a row, up 8.9% to reach $654.3B. I do not expect this level of growth to continue and am of the opinion industry participants unable/unwilling to adapt to change and to increasingly use technology to their advantage will become acquisition targets.

Historically, ATD’s growth was fueled 70% by acquisitions with the remaining 30% being organic growth. Going forward, growth is expected to be closer to a 50-50 split; this includes international growth. I suspect ATD has identified at least 1 or 2 potential acquisition targets that are within the top 50 industry participants reflected in the 2019 top convenience store ranking.

In my July 10^th article I touched upon the degree to which ATD is deleveraging. I also pointed out that ATD continues to be rated Baa2 by Moody’s and BBB by S&P Global with both ratings being the middle tier of the lower medium grade category. These ratings have not changed subsequent to that article and I still consider these ratings satisfactory for my purposes.

I also pointed out that ATD may not be an appropriate investment for investors who rely heavily on dividend income. In fact, ATD does not even have a page on its website devoted to its historical dividend track record. If you want historical information on the quarterly dividend payments, a link is provided which takes you to the TSX website; you will want to look at the Class B shares as the Class A shares are the thinly traded shares which are majority owned by insiders.

Further discussion on ATD’s dividend is of little value as wealth creation from the ownership of ATD shares will come through capital gains. If, however, you are interested in ATD’s dividend growth rate subsequent to 2010, please review page 38 of 43 in the October 2019 Investor Presentation.

Valuation

In the subscriber version of my July 10, 2019 article I compared ATD’s current valuation to its historical valuation over various timeframes.

I wrote that at the time of my July 10, 2018 article, the consensus estimate from 13 analysts called for FY2019 adjusted diluted net EPS of ~USD $3.05. ATD was trading at CDN $60.80 or USD $46.41 which resulted in a forward adjusted PE ratio of ~15.2 (USD $46.41/USD $3.05).

At the time of my September 6, 2018 article, ATD was trading at CDN $66.07 or USD $50.10 and the consensus estimate from 13 analysts for FY2019 adjusted diluted net EPS was USD $3.10 resulting in a forward adjusted PE ratio of ~16.2 (USD $50.10/USD $3.10).

On July 10, 2019, ATD closed at CDN $85.81 or USD $65.70 (CDN $42.905 or USD $32.85 following the 2 for 1 stock split in September). I envisioned analysts would be revising their FY2020 adjusted EPS estimates following the release of FY2019 results but based on the information I had at the time I saw that USD $3.35 ($1.675 post-split) was the current FY2020 mean estimate from 11 analysts. This resulted in a forward adjusted PE of ~19.6 (USD $32.85/USD $1.675).

Based on my analysis I indicated there is no disputing ATD is a growth business but following the significant run-up in the share price over the last few months, I was of the opinion the valuation was such that there was little margin of safety.

Now, let’s look at ATD’s adjusted diluted EPS for 2011 – 2019 found on page 38 of 43 in the October 2019 Investor Presentation; we see that the compound annual growth rate is 22%!

ATD generated USD $1.66 in FY2019; this takes into consideration the recent 2 for 1 stock split because the March 2019 Investor Presentation I have on file reflects adjusted diluted EPS data for years prior to 2019 that are exactly double the figures reflected in the October 2019 Investor Presentation.

If we very conservatively estimate 12% - 15% growth in FY2020 versus the 22% evidenced over the previous 9 year period (just to be conservative) we arrive at an adjusted diluted EPS projection of USD $1.86 - $1.91. With shares now trading at USD $29.90 we arrive at a forward adjusted diluted PE range of ~15.65 - ~16.08.

I consider the current valuation to be reasonable given ATD’s long-term growth potential.

Final Thoughts

In my July 10^th article I recommended investors patiently wait for a better entry point. In the ‘Final Thoughts’ section of that article I provided the following quotes from Monish Pabrai on the importance of being a patient investor:

‘The biggest, the single biggest advantage a value investor has is not IQ. It is patience and waiting. Waiting for the right pitch and waiting many years for the right pitch.’

‘You don’t make money when you buy stocks. And you don’t make money when you sell stocks. You make money by waiting.’

By having patiently waited we now find ATD to be slightly better valued than at the time of my previous article. With the recent retracement in ATD’s share price to the CDN $39.08 / USD $29.90 level I have acquired additional shares for an account in which I do not disclose details; ATD.b shares are also held in one of the Side Accounts within the FFJ Portfolio.

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.