Alimentation Couche-Tard Stock Analysis – A Canadian Success Story on Which I Will Pass

(Last Updated On: September 21, 2017)

Summary

  • This Alimentation Couche-Tard analysis is based on FY2017 results as at April 30, 2017 released August 3, 2017.
  • Alimentation Couche-Tard is the second largest convenience store operator in the world behind Japan’s Seven & I Holdings.
  • The company has taken on considerable debt to assist with its dramatic growth over recent years.
  • Operating margins are thin and FCF/share as at FYE2017 was lower than as at FYE 2014 and FYE2015 although it did bounce back from the FYE 2016 level.
  • Any expected return on an investment in this company will need to come from capital appreciation as the dividend is immaterial.
  • Alimentation Couche-Tard does not fit my investor profile and I will not be investing in the company.

Alimentation Couche-Tard Inc. (TSX: ATD.B) reports its financial results in USD. Its stock, however, is only traded on the TSX. The stock price and per share values reflected in this post are, therefore, reflected in CDN dollars.

Introduction

A reader reached out to me recently suggesting I may want to look into ATD.B, the world’s second largest convenience store operator behind Japan’s Seven & I Holdings (OTCPK: SVNDY). I am certainly familiar with both brands in that I see their retail outlets daily. It was not until I purchased and read Daring to Succeed – How Alain Bouchard Built the Couche-Tard & Circle K Convenience Store Empire that I came to appreciate just how remarkable the ATD.B story really is.

In the biography, there is mention of Alain Bouchard working for Perrette in the 1970s, once a popular chain of convenience stores in the Province of Quebec which ATD.B eventually acquired. In fact, there is reference to Bouchard working in a store in Town of Mount Royal where I was born and raised. It is possible I encountered Mr. Bouchard during one of the many times I went into the convenience store located but a few blocks from my home.

Industry Analysis

The convenience store (“c-store”) industry is highly fragmented and extremely competitive and it is not uncommon to read about one of the larger competitors acquiring a small number of stores from a smaller competitor. Periodically, however, you will read about much larger game-changing acquisitions. I touch upon this in the “Events Subsequent to FYE 2017” section later in this post.

Here is a wonderful website if you are interested learning about the latest news in the c-store industry. Included on this website are articles about the trends that are expected to impact the industry.

You will also find a list of the top 202 c-store chains and can click on each chain name to obtain more data.

Fiscal 2017 Financial Results

ATD.B’s 2017 Annual Report and Management Discussion and Analysis can be found here. For ease of reference I also provide the following.

ATD.B Summary Analysis of Consolidated Results of Fiscal 2017
ATD.B Summary Analysis of Consolidated Results of Fiscal 2017

(Source: ATD.B’s 2017 Annual Report from company website)

ATD.B Financial Analysis from Scotiabank GBM
ATD.B Financial Analysis from Scotiabank GBM

Events Subsequent to FYE 2017

On May 30, 2017, ANCUF acquired 53 company-operated sites from American General Investments, LLC and North American Financial Group, LLC, located in Louisiana. Details of the acquisition of the convenience stores which operate under the Cracker Barrel brand can be found in ANCUF’s President’s Message on the company’s website under Making the Most of our Acquisitions.

ANCUF’s acquisition of CST Brands closed June 28, 2017. Details regarding competition clearance in Canada and the US can be found here and here.

On the same day, ANCUF sold to Parkland Fuel Corporation a significant portion of CST’s Canadian assets for ~$0.968B. Details of this transaction can be found in this Press Release.

On July 10, 2017, ANCUF announced that it had entered into an agreement with Holiday Companies to acquire all issued and outstanding shares of Holiday Stationstores, Inc. and certain affiliated companies. Details can be found in this Press Release.

Holiday’s stores are located in Minnesota, Wisconsin, Washington, Idaho, Montana, Wyoming, North Dakota, South Dakota, Michigan and Alaska. This transaction will result in ANCUF expanding its presence into Alaska, Montana, Idaho, North Dakota, South Dakota, and Wyoming.

Dividend

ATD.B is certainly not an investment for investors seeking a steady stream of dividend income. A tell-tale sign is that when looking for the dividend history of both classes of stock, the company’s website site takes you to the TMX website (The Toronto Stock Exchange).

Both classes of shares pay a quarterly $0.09/share dividend or $0.36/year. This translates into a dividend yield of 0.61% based on the August 8, 2017 $59.22 closing share price.

When I make an investment in a company because I like its long-term potential, I typically like to automatically reinvest my dividends. In the case of ATD.B, I would need to own roughly 658 shares ($59.22/$0.09) in order to acquire 1 share. Am I willing to invest just under $39,000 (658 x $59.22) in ATD.B? No!

Valuation

Consensus 2018 earnings expectations are $2.76 thus resulting in a forward PE of 21.46 for 2018 using the $59.22 closing stock price as at August 8, 2017. Since ATD.B is morphing faster than most companies I analyze, I am reluctant to place little reliance on EPS expectations beyond FY2018.

ATD.B EPS Consensus Expectations Aug 3 2017
ATD.B EPS Consensus Expectations Aug 3 2017

Source: TD Bank WebBroker

Some analysts are far more optimistic than Scotiabank Global Banking and Markets because their 2018 EPS estimate is $2.56 (see image included in the Fiscal 2017 Financial results section of this post).

I thought I would add an additional Downside/Upside section which I do not customarily include in other posts.

Downside

Goodwill, Intangible Assets, and Other Assets

For those unfamiliar with Goodwill as an asset, it is an intangible asset that arises when a buyer acquires an existing business. It essentially amounts to the excess of the amount of money paid to purchase the asset or business that is in excess of the total value of the assets and liabilities.

An intangible asset is an asset that is not physical in nature. Examples include corporate intellectual property, including items such as patents, trademarks, copyrights and business methodologies, and brand recognition.

The Other Assets as reflected in Note 18 of the 2017 YE F/S include environmental costs receivable, deferred compensation assets, deposits, pension benefit assets, net deferred charges, investment contract including an embedded total return swap. Additional details can be found in Notes 24 and 28.

These assets might be of value when the business is performing well but can dramatically drop in value when things are not going so well. Rightly or wrongly, I generally take these values with a grain of salt since I do not view these assets as assets on which I can “hang my hat”.

ATD.B Goodwill Int Assets Other Assets Analysis 2010 - 2017
ATD.B Goodwill Int Assets Other Assets Analysis 2010 – 2017

Now have a look how these soft assets have dramatically risen in the 2010 – 2017 period. They now represent just under 24% of Total Assets as reflected on the April 30, 2017 fiscal year end. Good grief!

If I back out these assets which total ~$3.36B then I need to back out the same amount from the Liability and Equity side of the Balance Sheet. The Equity on the Balance Sheet amounts to $6.01B but when I deduct the ~$3.36B, I get an adjusted Equity of $2.65B.

Debt Level

Let’s not kid ourselves, ATD.B has debt. A LOT of debt!

Long-term debt and the current portion of long-term debt increased by $0.51B, from $2.8B as at April 24, 2016, to ~$3.36B as at April 30, 2017, mainly as a result of the acquisition of Dansk Fuel shares and IOL assets, partly offset by the impact of the weaker Canadian dollar and Euro against the US dollar, which was approximately $0.174B and by debt repayments.

If I divide the long-term debt and the current portion of long-term debt of ~$3.36B by my adjusted Equity figure of $2.65B, I get a revised (LTD+CPLTD)/Equity ratio of 1.27 times.

I know this is an extremely hard-line approach and some readers may disagree with my approach given that the probability of ATD.B becoming insolvent is nowhere in the cards. If you opt not to take my hard line approach and to just use the figures directly from the FYE2017 F/S, the ~$3.36B divided by $6.01B in Equity results in (LTD+CPLTD)/Equity ratio of 56%. While this is high in my books, at least the ratio has not deteriorated from the 56% as at FYE 2016 and it is an improvement from 65.5% and 78.7% reported April 30, 2014 and 2015.

Working Capital and Free Cash Flow (FCF)

Working Capital as at April 30, 2017 was negative. This certainly raises my eyebrows when I see a company generating just under $38B in annual Revenue.

ATD.B Key Ratios from Morningstar Research as at August 8, 2017
ATD.B Key Ratios from Morningstar Research as at August 8, 2017

I also see that the ratio of FCF to Revenue is worse than it was in fiscal 2015 and 2016.

Growth by Acquisition

ATD.B is certainly in growth mode as evidenced by the following table extracted from the 2017 Annual Report.

ATD.B Change in Store Network in 2017
ATD.B Change in Store Network in 2017

(Source: ATD.B’s 2017 Annual Report from company website)

How many times have you heard about a company closing an acquisition and when it “looks under the hood” it finds out the recently acquired company is rife with problems?

Integrating a newly acquired company that runs on different systems, has a different culture, etc. is not an easy task. Integration costs can be substantial and if the team at the acquired company is not on board, integration costs can very quickly escalate.

Having said this, ATD.B has done countless acquisitions over the years. It started by focusing on acquisitions in Canada, branched out to acquisitions in the US, and also made international acquisitions. Through this evolution, it has learned what works/does not work.

One thing that truly impresses me is the focus on employee relations. An example of this came about in 2012 when ATD.B acquired the retail activities of Statoil Fuel and Retail.  It was clear to employees that the stores were the top priority of ATD.B as demonstrated by Bouchard’s insistence that only a few hours be spent in office meetings with the management team. The focus was on spending time in the stores and getting the lay of the land from managers and employees so as to measure the effectiveness of the marketing strategies, new products or updated layouts.

Dual Class Share Structure

I reference Note 25 in the 2017 Annual Report wherein it is disclosed that ATD.B has a dual class structure. The Class A multiple voting and participating shares are entitled to 10 votes per share except for certain situations which provide for only 1 vote per share and are convertible into Class B subordinate voting shares on a share-for-share basis at the holder’s option. Under the articles of amendment, no new Class A multiple voting shares may be issued.

I have no objection to a Dual Class structure if the controlling shareholders are ethical and have no reason to suspect otherwise in the case of ATD.B.

It should be noted that Alain Bouchard controls 53% of the votes. I strongly suspect he is thinking long-term!

The following table reflects the Issued and Outstanding Shares as at ATD.B’s April 30, 2017 fiscal year end.

ATD.B Issued and Fully Paid OS Shares
ATD.B Issued and Fully Paid OS Shares

(Source: ATD.B’s 2017 Annual Report from company website)

You are also encouraged to read Note 26 – Stock-Based Compensation and Other Stock-Based Payments. Look at some of those stock option exercise prices.

ATD.B Stock Based Compensation and Other Stock Based Payments
ATD.B Stock Based Compensation and Other Stock Based Payments

(Source: ATD.B’s 2017 Annual Report from company website)

Some folks are going to make out like bandits! I certainly would not be able to acquire ATD.B shares at some of these levels and I suspect these options will be exercised. I am, therefore, including the Dual Class Share Structure as a “negative”.

Environmental Risks

Fuel is stored in underground storage tanks. You get a leak in a tank and you have to act very quickly since remediation costs can be significant.

I have not been able to easily locate the annual remediation costs incurred by ATD.B so if there is a problem, I am unaware of the magnitude. ATD.B, however, makes note in its YE F/S that it provides for estimated future site remediation costs to meet government standards for known site contamination, when such costs can be reasonably estimated. Estimates of the anticipated future costs for remediation activities at such sites are based on its prior experience with remediation sites and consideration of other factors such as the condition of the site’s contamination, location of sites and experience of the contractors performing the environmental assessments and remediation work. In order to determine the initial recorded liability, the present value of estimated future cash flows was calculated using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

Electric Vehicles

The number of electric vehicles is increasing exponentially as it is expected that around 2020 electric cars will be cheaper to produce than gasoline vehicles. Earlier this year, Morgan Stanley raised its predicted sales estimates of electric vehicles by 2025 by threefold.

Clearly electric vehicles are here to stay and will impact the c-store landscape. Just how is unclear. ATD.B is, however, not asleep at the switch. It is looking to Norway for guidance on how to adapt to growing electric car sales.

Stagnant Growth in Gasoline Consumption

As evidenced by the following graph, gasoline consumption in the US has been less than stellar. With electric vehicles expected to become increasingly popular I suspect this trend will continue well beyond 2018. It remains to be seen how ATD.B will adapt in the new environment.

US Gasoline Consumption Growth
US Gasoline Consumption Growth

(Source: TD Securities Action Notes July 31, 2017)

Changes in Legislation re: Nicotine Products

Gas stations and convenience stores have had to continually evolve over the decades to offer a much broader range of products. Tobacco consumption has been in a long-term decline. As a result, c-store retailers are shifting into fresh food (particularly in the US and in Europe) by using their extremely convenient locations to take share from the quick service restaurants and grocery channels.

US Cigarette Consumption Growth
US Cigarette Consumption Growth

(Source: TD Securities Action Notes July 31, 2017)

Upside

Interest Rates on Debt

ATD.B met hundreds of U.S. fixed-income investors and when it was all over managed to secure financing on very attractive terms for funding to finance the CST acquisition. The terms of the 3-part US$2.5B offering were slightly better than what ATD.B expected to pay when the lead managers — HSBC, MUFG Mitsubishi UFJ Financial Group and Wells Fargo Securitieslaunched the transaction.

Terms of the offering were:

  • US$1B at a coupon of 2.72% for 5 years;
  • US$1B at 3.55% for 10 years;
  • US$0.5B at 4.50% for 30 years.

In terms of a spread above comparable U.S. Treasuries, ATD.B ended up paying 5 bps less than originally expected when guidance was released (100 bps = 1%). A 5 bps gain on US$2.5B is not chump change.

The attractive terms ATD.B was able to negotiate suggests sophisticated investors are confident in the company’s ability to service its obligations.

Possible Future Listing on a Major US Exchange

If you look at the ATD.B Summary Analysis of Consolidated Results of Fiscal 2017 found in the Fiscal 2017 Financial Results section of this post you will see that ATD.B generates a significant proportion of its revenue in the US.

I strongly suspect ATD.B will list on a US exchange in the not too distant future. I don’t have a crystal ball but given ATD.B’s growth ambitions and its market cap, I suspect this is something US investment bankers have been pitching to ATD.B’s senior management. If this happens then I would imagine ATD.B’s shares will pop.

Don’t Bogart That Joint

This one is on the lighter side of things and is targeted to readers familiar with the movie “Easy Rider”.

Smoke ‘em if you got ‘em! Buy your cigarettes, liquor, and doobies at the same time as you fuel your vehicle and buy snacks to satisfy those munchies you’ll get!

ATD.B has a long history of selling tobacco and alcohol and has disclosed that it has hired a lobbyist to work on ensuring it is involved in the cannabis-distribution system the province of Quebec will eventually set up.

Alimentation Couche-Tard Stock Analysis – Final Thoughts

I must admit I am impressed with how ATD.B has grown since the early 2000s. While it might be a wonderful company, ATD.B certainly does not fit my investor profile and I have no intention of initiating a position in the FFJ Portfolio nor in any of our other investment accounts.

If you invest in a company where the vast majority of your returns are expected to come via capital gains, you had better hope everything goes right. At least I am rewarded for my patience in the case of a company which pays a reasonable dividend. In fact, I like it when a reasonable dividend payor experiences a drop in its stock price (on the understanding that it is not because of a long-term impairment in the company) because my dividends will allow me to acquire a greater number of shares. In the case of ATD.B, I would be uncomfortable investing the amount that would be required to generate a quarterly dividend which would be sufficient to buy just 1 share!

Furthermore, I suspect many investors focus on stock-market indices and see that new records are being set. Many of these same investors probably think all is rosy. I do not fall in that camp. I am of the opinion that a correction is overdue and some other investors are of the same opinion. If we do get a correction, I suspect ATD.B will get caught in the downdraft.

Note: I sincerely appreciate the time you took to read this post. As always, please leave any feedback and questions you may have in the “Contact Me Here” section to the right.

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 currently have no position in ATD.B and am unlikely to initiate a long position within the next 72 hours.

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.

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4 thoughts on “Alimentation Couche-Tard Stock Analysis – A Canadian Success Story on Which I Will Pass”

  1. Thank you for your work Charles. Nice article. To each his own:) Have you guys looked at ATD.B chart compare to both the S&P TSX and S&P 500 over the last 5, 10 years and since inception? I love dividends as much as the next guy but total return is even better. The next 20 years they might not be as successful as the past 20 years, but why would you want to bet or pass against them?

    1. Phil,

      ATD.B is miles ahead when compared to the S&P TSX and S&P 500. There is just no comparison.

      I agree that ATD.B was certainly on a tear for a few years but its stock price has certainly leveled off somewhat starting August 2015. I wonder how investors who bought ATD.B in August 2015 feel about their investment. They certainly have not received a lot in the way of dividends. In addition, here we are, 2 years later, and the stock price is virtually the same. This poor investor would have almost no return to show for his/her investment unless he/she timed their sale just right.

      I am a buy and hold investor so if I had bought shares I would not have sold my shares when they ticked up briefly in 2016. I would still own them and I would be that poor soul in my example. I would actually be further behind than at the time of purchase because the value of today’s dollar is less than it was in 2015.

      I just can’t bring myself to get the same “peace of mind” investing in ATD.B as I do investing in V, MA, CNR, MMM, JNJ. Those companies may not have the same meteoric growth in stock price as ATD.B but at least I know my return doesn’t just hinge on the growth in stock price. I want to get paid while owning something. In the case of ATD.B I would have to sell something to get paid. In addition, these other companies I have listed have decent margins. ATD.B, however, operates on razor thin margins so there is not a lot of margin for error.

      I know you invested in ATD.B and I sincerely wish you considerable success with this investment.

      Thanks for commenting. Cheers.

      Charles

  2. Hi Chuck, as a sometimes blogger about my travels, and an active investor, I am impressed by the effort required to write a blog, and especially by your stock analyses. Given your stated goal to invest only in dividend yielding companies, I wonder why you even bothered to analyze this company. Having read your report, and Scotia Capital’s I am now a bit intrigued by the company, albeit it is not my style.since I do not like companies with very thin margins, as their earnings are susceptible to minor changes in revenues or expenses, and as such I would not invest in ATD.B. I like growing companies with strong moats. Still, I looked at a number of research reports, Scotia has a 30% upside and given their past success of integrating acquisitions, anticipating market changes, (selling weed and offering EV charging) suggests that they may well continue to execute and have significant price appreciation? Happy investing, andrew

    1. Andrew,

      Thanks for reading and commenting. These posts certainly do take a lot of time to research/write.

      I wrote this post after an exchange of emails with a loyal follower who asked me for my opinion on the company. I had no opinion as I knew little about it other than to see their stores all over the place. I took it as a challenge to learn about the company and ordered Alain Bouchard’s biography via the company’s website; I am always fascinated to read about people who have achieved a level of success that is uncommon. After having read the book I decided to delve into the industry and the company.

      Even though Scotia has a 30% upside and I am impressed with Alain Bouchard and his management team, I am passing on ATD.B.

      Regards.

      Chuck

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