Alimentation Couche-Tard (TSX:ATD) is one of Canada’s biggest corporate success stories of the past two decades. Going from a regional Quebec company to a national and international giant in the span of 20 years, it has really done some growing. The stock has performed well, too. In the span of 20 years, it has risen 3,636% in the markets, making it a tenbagger more than three times over.
With all that being said, ATD’s recent earnings results weren’t as good as its past ones. The company’s revenue and earnings declined last quarter, and the stock is down for the year. Low fuel sales were part of the problem. In this article, I will explore whether ATD stock remains a buy after its early-2024 challenges.
An indirect energy play
One reason for optimism toward ATD stock, at least in the short term, is the fact that energy prices were higher in the second quarter than in the first quarter. Oil prices rallied over the last few months, and gasoline/diesel prices kept pace. So, ATD’s fuel sales for the second quarter are likely to be higher than they were in the first quarter. Technically, this is ATD’s fiscal fourth quarter about to be reported, as the company uses an unusual fiscal year – I call them “first” and “second” quarter to indicate the calendar period.
In the most recent quarter, fuel sales were 73% of ATD’s total revenue and 48% of total gross profit. So, fuel is a big contributor to ATD’s financial results. This provides hope that the upcoming quarter’s earnings will have a positive effect on the company’s stock price, as the company will benefit from higher prices in the period about to be reported.
A smart expansion
Another factor that Alimentation Couche-Tard has going in its favour is a good expansion strategy. The company smartly expanded Circle-K all across Canada by re-investing earnings, instead of borrowing heavily. One consequence of that was a low dividend yield, but at the same time, the company also managed to grow a lot without taking on too much leverage. As a result, its debt-to-equity ratio is only slightly higher than one, and its interest expenses are not very high as a percentage of revenue.
Recent earnings
ATD’s most recent earnings were fairly disappointing. They missed analyst expectations, with metrics like:
- $5 billion in merchandise revenues, up 3.4%.
- $14.3 billion in fuel revenue, down 2.6%.
- $624 million in net income, down 15%.
- Return on equity: 23.2%, down 1.5%.
Apart from merchandise revenues, the numbers all declined. However, the outsized contribution of fuel revenue to total revenue provides hope that the second quarter release will be better.
Foolish takeaway
On the whole, Alimentation Couche-Tard stock looks like a decent opportunity today. The past explosive returns likely won’t continue, but the economic fundamentals affecting the company are favourable, and management is competent. I’d expect investors who buy it to at least be fairly “safe.” In a best case scenario they might realize high returns. I don’t own it, but I’d feel comfortable if I did own it.
