New Stock to Study: Alimentation Couche-Tard

Better known as Macs on the west coast or Circle K in the US, ATD is the second largest operator of convenience/gas bar stores in North America. Latest earnings and revenues.

Bull's Take:

• Established brand in a boring, slowly changing industry with largely predictable cash flows that tend not to be as cyclical as other consumer sectors
  
• 5600 stores but only 20% market share in Canada and 2% in the USA (room to grow but has sufficient economy of scale to warrant a narrow moat)
• Management's track record is excellent: smooth acquisition integration, ROE 18% highest ROC employed of all comps 20%
  
• Growing rapidly but not too rapidly: EPS increased by average 38%/year over the past 5 years, top line growth 51% increased yoy,
• Company remains highly profitable despite heavy pressure on margins by high gas prices and strong loonie-- if these 2 factors ameliorate a bit, earnings should exceed expectations
• Strong balance sheet with D:E ratio lowest amongst competition at 0.57. Net debt: capitalization 0.39. Well positioned to take advantage of increasingly cheap acquisitions and recent large scale divestments of Big Oil's corner stores/gas bars (Exxon has been doing this already)
• Plans for expansion into Asia under way with a deal for opening franchises in Vietnam signed last quarter
• 20% insider owned-- management and shareholder's interests squarely aligned
• 50 million dollars of shares have recently been "bought back" by the company
  
• Share price is markedly depressed v.s. historic valuation i.e. mean P/E of 20 now trailing P/E is 14 and FPE is 11

Bear Case:

• minimal dividend
• secondary offers of shares have been dilutive to owner's earnings
• inflation and high fuel prices unlikely to go away anytime soon, if ever
• nuisance lawsuits v.s. the company with anti-competitive allegations seem to be popping up and may fall on sympathetic judicial ears, particularly in Quebec.
  

DCF calculations using 15% EPS growth for the next 5 years diminishing to 5% thereafter and assuming a 6% return on a risk free alternative investment puts the FMV stock price 5 years out as high as $66/share. I think that a more realistic target would be $25/share within the next 1-2 years.


I don't think that many would argue that at $12.75 today, this company certainly has a generous margin of safety. I would be interested in starting a position at $10/share or less in the current environment, only because I really think that there is a chance the share price could dip that low.

Other than the lack of an acceptable dividend, this company has all the attractive characteristics of a company I would love to own a piece of. Have a look at the AGM investor presentation.