Alimentation Couche-Tard (TSX:ATD) is one of the Canadian stock market’s best-kept secrets. Having risen 2,278% since the start of 2010, it has soundly outperformed the TSX, the S&P 500, the NASDAQ, and pretty much every other benchmark.
The question is, is it still a buy now?
It’s one thing to note that a company has done well, but quite another to confidently state it will continue doing well. As I will show in this article, ATD has at least one “ace” up its sleeve that could propel more growth going forward. However, there are other factors that don’t flatter it so much, and those have to be examined as well. So, let’s jump into the main reasons for buying, selling, and holding ATD stock.
The case for buying
The main reason why you’d want to buy ATD stock is because the company has a stellar capital-allocation track record. Over the last 10 years, the company has grown its earnings by 16.5% CAGR (a term that means compounded annualized growth). That’s not an accident. It’s the result of a prudent acquisition strategy on the part of ATD’s management. Rather than fuel growth by borrowing huge amounts of money, ATD’s leaders have instead opted to reinvest large percentages of their profit into the business.
ATD successfully acquired Circle K using this strategy. Today, it’s one of the biggest gas station chains in the country. The “reinvestment” strategy has resulted in Circle K having a low dividend yield, but with total returns as high as they have been, is that even a problem?
The case for selling
On the whole, I consider ATD a pretty good stock. Nevertheless, there are some less-flattering things about the company. Some might consider these things as signals that it’s time to sell.
One thing about ATD that’s not so positive is the fact that its growth has slowed down in recent years. Over the last 10 years, the company grew its revenue by 6% CAGR and its earnings by 16.5% CAGR. That sounds great, but over the last year, revenue declined 3.1%, while earnings grew a mere 5%. So, the growth has decelerated a lot.
That’s not to say that this trend will persist, but the five-year growth rate is down from the 10-year growth rate, the three-year growth rate is down from the five-year growth rate, and the 12-month revenue growth rate is negative. It does look like there’s something of a trend here.
The case for holding
The case for holding ATD rests on the fact that the company is well managed. The deceleration in ATD’s growth is explained by the fact that it grew so rapidly 10 years ago. In the 2010s, ATD was busy expanding Circle K all over Canada, so, naturally, it was growing a lot in that period.
Today, Circle K has reached market saturation, so growth is a little slower. However, Couche-Tard continues its expansion in Europe, so it’s not like growth is done forever. The growth might even ramp up somewhat if oil prices increase, as Circle K is in the business of selling fuel. Plus, the stock only trades at 18 times earnings, so it’s not like you’re paying a huge premium for what you’re getting.
