Shares of Alimentation Couche-Tard (TSX:ATD) have been dropping lower in the last while, as the company provided disappointing results during its most recent earnings report back in March. However, investors may be wondering if this is an opportunity to pick up the convenience retailer and see it recover.
Before we do that, let’s look at Couche-Tard stock’s earnings over the last few quarters. Further, examining what the company has planned for the future, and whether fundamentals support it as a buy on the TSX today is worthwhile
Earnings
Investors may look at an earnings report and see that the company is growing year over year. But that’s not very helpful if it is actually shrinking quarter after quarter. Which is why we’re going to look at the last three quarters to see if there has been any momentum.
During the first quarter, Couche-Tard stock reported net earnings of $834.1 million. The stock’s gross margins remain healthy in North America, but are decreasing in Europe from market volatility. By the second quarter, net earnings had shrunk further to $819.2 million, with expenses growing as well. The company also announced a buyback program, however, leading some to wonder if better things were coming despite the challenges.
However, the third quarter was quite disappointing. Net earnings were just $623.4 million, with barely any movement on total revenues and expenses climbing even further. So while the retailer saw significant network growth with more stores popping up in Europe and the United States, that could simply mean more costs for the company.
Downgrade
While more stores could lead to more sales, as mentioned that won’t be so great if the company continues to see costs rise – all on the back of higher inflation and interest rates. This is why analysts downgraded Couche-Tard stock after the most recent earnings report.
There were mainly concerns about weak merchandise performance that continued through the last few quarters, and is likely to do so in the near term. It’s now questionable whether the company’s growth plan of “10 for the Win” strategy is actually working.
Furthermore, not all can be blamed on higher interest rates and inflation. The company saw underperformance in fuel and merchandise metrics, with higher expenses. Therefore Couche-Tard needs to consider cutting back, rather than expanding further.
Is it a buy?
Right now, the average price-to-earnings (P/E) ratio, which compares a company’s current share price against its earnings per share, sits at 16.6 for Couche-Tard stock in the last five years. And yet, it currently trades at 18.3 times earnings as of writing. Therefore, it looks more expensive compared to historic prices.
Shares are still up 11% in the last year, but have fallen back from earnings. What’s more, the company continues to build up debt as its net earnings decrease. Therefore, is Couche-Tard stock a buy? I would say no. Management needs to come up with a far better strategic response to the current market conditions – and until that happens, cut back on the expansion of the company.
