Contents
Alimentation Couche-Tard (ATD.to) is arguably the best operator in the highly fragmented convenience store industry. Despite being a wonderful company, however, shares are currently fairly valued. I am not, therefore, currently adding to my exposure.
I think we are once again experiencing a period of irrational exuberance. In late October/early November, it was easy to identify great companies with attractive valuations. Now, the pendulum has swung in the opposite direction.
I last reviewed ATD in this July 10, 2023 post at which time, it had just released its Q4 and FY2023 results. Recently, ATD:
- received a decision from the European Commission not to oppose ATD's acquisition of certain European retail assets from TotalEnergies, which was previously announced on March 16, 2023.
- completed the acquisition of 112 company-operated fuel and convenience retail sites from MAPCO Express Inc. that was previously announced on April 27, 2023;
- held its 2023 Analyst and Investor Conference at which time its announced its 10 for the Win five-year strategic plan; and
- released its Q2 and YTD2024 financial results;
Given these recent events, I take this opportunity to revisit this existing holding.
NOTE:
- ATD's shares trade on the TSX in Canada and over the counter in the US.
- Operating results are in USD. I use a USD $1 = CDN $1.3583 conversion rate for this post and USD $1 = CDN $1.3289 for my July 10, 2023 post.
Business Overview
ATD's 2023 Annual Information Form provides a comprehensive overview of the company. When this publication was released in June 2023, ATD had more than 14,400 convenience stores and ~128,000 people in its network worldwide. This section of ATD's website shows where it operates globally. The store count in each business unit is as of October 15, 2023 and does not reflect the additional MAPCO and TotalEnergies locations.
TotalEnergies Retail Sites Acquisition
The acquisition of 100% of the shares of the Germany and Netherlands companies, and 60% of the Belgium and Luxembourg companies from TotalEnergies (TTE) adds the following to ATD's network (statistics are as at the end of 2022): 2,193 stores, of which 1,195 are in Germany. 1,225 are CODO sites, 698 are DODO sites, and 270 are COCO sites. In addition, 975 sites include car wash operations.
Following this acquisition, ATD will have the:
- #1 market share in Belgium,
- #2 market share in Luxembourg, and
- #4 market share in Germany and in the Netherlands.
Refer to ATD's March 16, 2023 Investor Presentation regarding the acquisition of certain European assets from TotalEnergies for more details.
The definition of ATD's CODO, DODO and COCO sites is provided below.
CODO
Sites for which the real estate is controlled by ATD (through ownership or lease agreements) and for which the stores (and/or the gas stations) are operated by an independent operator in exchange for rent and to which ATD 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 ATD 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.
COCO
These are sites for which the real estate is controlled by ATD (through ownership or lease agreements) and for which the stores (and/or the service stations) are operated by ATD or one of its commission agents.
Mapco Express Retail Sites Acquisition
On November 1, 2023, ATD closed the acquisition of 112 company-owned and operated convenience retail and fuel sites operating under the MAPCO brand and located in the states of Alabama, Georgia, Kentucky, Mississippi and Tennessee. The acquisition also includes surplus properties and a logistics fleet.
Total consideration was $0.471B, subject to post closing adjustments.
Five-Year Strategic Plan (10 for the Win)
In 2018, ATD set an ambitious objective to double its financial results again by 2023. Having successfully met its previous Double Again strategic plan, ATD announced at its October 11, 2023 Analyst and Investor Conference, its 10 for the Win five-year strategic plan. Over the next five years, ATD aims to achieve US $10B in EBITDA by FY2028, up from US $5.8B in FY2023 (net earnings of US $3.1B in FY2023) through both organic and inorganic initiatives.
A copy of the analyst and investor presentation is accessible here.
Financial Review
Q2 and YTD2024 Results
On November 29, 2023, ATD released its Q2 and YTD2024 results. Material related to this financial release is accessible here.
ATD is making progress on its goal to build 500 stores over the next 5 years. It has already finished 40 new stores in FY2024 and there are more than 100 sites in the construction pipeline and 1,000 sites identified for future growth opportunities. It also added 20 new Circle K-branded sites during the quarter under licensing agreements, bringing that total to over 2,100 sites.
The company is noticing some belt tightening but management is of the opinion the headwinds are transitory. While ATD is not recession proof, it is somewhat recession resistant.
Compared to Q2 2023, same store merchandise revenue increased by 1.6% in Canada. This growth was driven by beverage and food offers.
Same strore merchandise revenue fell by 0.1% in the US and 0.2% in Europe and other regions. The European operations experienced healthy same store sales. Overall results, however, were impacted by a challenging tobacco market and a drop in cross-border traffic in ATD's Hong Kong market.
ATD continues to experience headwinds in cigarette stick sales globally and the belief is that this consumer group has increased price sensitivity thus impacting overall demand. Usage continues to grow globally, however, in other nicotine products.
Performance of the fuel business in terms of volumes and margins was strong as ATD continues to draw traffic to its locations through a recurring promotional fuel days.
On the electric vehicle front, ATD's fast charging network now consists of almost 1,900 charging stalls. This is a 50+% increase from Q2 2023. ATD also has over 40 chargers for heavy trucks in Sweden and over 11,000 home and workplace chargers.
On the labour front, it is improving globally, and in particular, in North America. ATD is piloting comprehensive programs to improve employee retention and reduce turnover at its sites.
At the end of Q2 (October 15, 2023), ATD's return on equity was 23.7% and return on capital employed stood at 17%. ATD's leverage ratio remained healthy at 1.52 times despite having repurchased 30.6 million shares for $672.9 million during Q2 under our its normal course issuer bid (NCIB). Subsequent to Q2, ATD repurchased 0.3 million shares for $15.7 million under its NCIB.
At the end of the quarter, ATD had $1.4B in cash and an additional $3.2B available through its main revolving credit facility, net of US Commercial Paper borrowings.
NOTE: Walmart's (WMT) CEO said in a recent interview on CNBC that consumer spending in 2024 is tougher to predict because of rising credit card balances and dwindling household bank accounts. It is, therefore, entirely possible the headwinds ATD is witnessing are less than just transitory. It is entirely possible that all of 2024 will be a challenge for many consumers.
Revenue and Profit Mix
The following was ATD's revenue and profit mix in Q2 2024.
Impressive Financial Record
ATD's impressive historical results are a testament to its financial discipline.
Source: ATD - Q2 2024 Investor Presentation
ATD has ~$10B of incremental Balance Sheet capacity which bodes well for additional potential acquisitions.
Source: ATD - Q2 2024 Investor Presentation
Source: ATD - Q2 2024 Investor Presentation
Credit Ratings
On May 18, 2023, Moody's upgraded ATD's domestic senior unsecured debt from Baa2 to Baa1. On September 18, 2023, S&P Global, upgraded ATD's domestic senior unsecured debt from BBB to BBB+. Both ratings, the top tier of the lower medium-grade investment-grade category, define ATD as having an ADEQUATE capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity in which ATD can meet its financial commitments.
These ratings are satisfactory for my purposes.
Dividends and Dividend Yield
ATD's dividend history dating back to September 2013 is accessible here.
With shares trading at ~$77.50, the new $0.175/share quarterly dividend results in a sub 1% dividend yield. This dividend yield is likely to dissuade dividend-focused investors from considering ATD as a potential investment.
The bulk of ATD's total shareholder return is likely to continue to be in the form of share price appreciation. This is unlikely to change as ATD's capital allocation priorities favour the retention of funds for growth.
In FY2011 - FY2023, there were 1,129, 1,101, 1,121, 1,136, 1,137, 1,138, 1,139, 1,134, 1,130, 1,125, 1,107, 1,064 and 1,009.5 million shares outstanding.
On April 26, 2023, the Toronto Stock Exchange (TSX) approved another renewal of ATD's share repurchase program, which took effect on May 1, 2023. The renewed program allows the company to repurchase up to 49,066,629 shares, representing 5.0% of the shares outstanding as of April 20, 2023; the share repurchase period is to end no later than April 30, 2024.
After FYE2023, and under the renewed program, 4.1 million shares were repurchased for $204.1 million.
During the 12 and 24-week periods ended October 15, 2023, ATD repurchased 13,550,637 and 18,224,237 shares, respectively. These repurchases were settled for amounts of $672.9 and $902.9 million, respectively.
Subsequent to the end of Q2 2024, ATD repurchased 292,900 shares for an amount of $15.7 million.
Valuation
ATD's FY2013 - FY2023 diluted PE is 18.48, 27.74, 23.25, 23.36, 21.89, 15.64, 17.65, 13.76, 17.18, 15.68, and 18.53.
When I wrote my July 10, 2023 post, ATD had recently reported FY2023 $3.06 diluted EPS and $3.12 in adjusted diluted EPS. Using a $1.3289 conversion rate, I arrived at ~$4.07 in diluted EPS and ~$4.15 in adjusted diluted EPS. Using my recent $65.38 purchase price, the diluted PE was ~16 and the adjusted diluted PE was ~15.8.
The forward valuations using adjusted diluted EPS estimates from the brokers which cover ATD and my $65.38 purchase price were:
- FY2024 - 14 brokers - mean of $2.86 and low/high of $2.65 - $3.05. Converting the mean value using the conversion rate reflected at the outset of this post, I arrived at ~$3.80 CDN. The forward adjusted diluted PE was ~17.2.
- FY2025 - 13 brokers - mean of $3.21 and low/high of $2.80 - $3.48. Converting the mean value using the conversion rate reflected at the outset of this post, I arrived at ~$4.27 CDN. The forward adjusted diluted PE was ~15.3.
ATD's forward valuations using brokers' adjusted diluted EPS estimates and the current ~$77.50 share price are:
- FY2024 - 15 brokers - mean of $3.20 and low/high of $2.96 - $3.55. Converting the mean value using the conversion rate reflected at the outset of this post, we get ~$4.35 CDN. The forward adjusted diluted PE is ~17.8.
- FY2025 - 15 brokers - mean of $3.39 and low/high of $2.80 - $3.67. Converting the mean value using the conversion rate reflected at the outset of this post, we get ~$4.60 CDN. The forward adjusted diluted PE is ~16.8.
Final Thoughts
ATD is perhaps one of the best, if not the best, operators in the highly fragmented convenience store industry.
Investors must analyze several metrics to determine if a company is a worthwhile investment. One metric to look at is revenue growth. Looking at ATD's annual revenue in FY2014 - FY2023 (in billions of $ rounded), we see an encouraging trend: 38, 35, 34, 38, 51, 59, 54, 46, 63, and 72; the drop in 2021 is attributed COVID. In the first 24 weeks of FY2024 (end of Q2), ATD has generated 32. If we account for the additional outlets ATD will be adding to its network by way of the TotalEnergies and MAPCO Express transactions, it is reasonable to expect ATD's top line to meet and/or exceed 72.
In addition to its consistent revenue growth, ATD tightly controls operating expenses. On the Q2 earnings call with analysts, ATD indicated that there is ~$0.8B of costs it is looking to eliminate over the next 5 years.
Its long term ambition is to outperform overall inflation by at least by 1%. Naturally, results can fluctuate from one quarter to another.
I currently hold 1227 ATD shares in one of the 'Side' accounts within the FFJ Portfolio. When I complete my Mid 2023 Investment Holdings Review, ATD was not a top 30 holding. As much as I like ATD as a long-term investment, I am looking to add exposure to companies that are undervalued. If I have to wait on the sidelines for the right opportunity then so be it.
I consider ATD to currently be fairly valued, and therefore, am not acquiring additional shares at this time. If ATD's share price were to drop to ~$72, the forward adjusted diluted PE based on FY2024 estimates would be ~16.6 and ~15.7 based on FY2025 estimates. This strikes me as a more reasonable valuation.
I wish you much success on your journey to financial freedom.
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long ATD.to and WMT.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
