Alimentation Couche-Tard (TSX:ATD) stock has been one of the best performing TSX retail stocks over the last several decades. The stock has risen some 430% over the last 10 years, and over 1,000% since the beginning of the 2010s. This stock has gone places. It was consistently going places every year up until this year, when it finally took a major dip, falling 9.8% from its 52-week highs set in February. The question investors have to ask now is, is the business actually deteriorating, or is this dip a buying opportunity?
Personally, I’m inclined to think it’s an opportunity. Alimentation Couche-Tard is very well run, having completed a successful expansion of Circle-K all across Canada, and now focusing on its expansion into Europe. The company offers a bit of energy exposure while not being a pure play oil company – those can be very volatile and stressful to hold. For these reasons, I think ATD is likely to be a decent buy today.
ATD offers some energy exposure
One thing about ATD that is appealing is the fact that it offers a bit of energy exposure. It makes a significant portion of its revenue from gasoline, and turns a profit on fuel sales. It’s often understood that convenience stores don’t make much money off fuel sales, instead profiting off of bringing customers into the store to buy chips, pop, and lottery tickets. ATD’s statements seem to imply that the company is making money off of fuel sales.
For example, a 2021 investor presentation speaks of “fluctuating margins on fuel sales,” and the recent third quarter earnings release says that the company earned $1.6 billion in road transportation gross profit in the period. That was half of the company’s entire gross profit for the period, so ATD is making real profits off of fuel sales. This makes ATD partially an energy play. However, it is not so exposed to oil/gasoline/diesel prices that it can’t thrive in oil bear markets. The company performed well all through the 2010s, when oil prices were generally low.
Management has a good strategy
Another reason why I’m pretty optimistic about ATD is because its management has a good mergers annd acquisitions (M&A) strategy. The company does not pay out an overly high percentage of its earnings as dividends. Instead, it reinvests its profits back into its operations. One consequence of this is a low dividend yield – just 0.83% – but also a healthy balance sheet and plenty of money to spend on future acquisitions. ATD is currently working on expanding its franchise in Europe, so these financial advantages are considerable. They are better than paying a high yield and having to borrow money to do deals would have been.
Recent results
Now for the negative part: ATD’s most recent two earnings releases missed analyst estimates, and showed negative revenue growth. That wasn’t such a good showing, but oil prices and gasoline prices have risen since then. It’s quite likely that ATD will show positive revenue growth in its upcoming earnings release, and possibly positive earnings growth as well. If so, its stock will look to have been a good value at today’s prices.
