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Alimentation Couche Tard Inc. Falls to Just Over $58: Should Investors Add on Weakness?

If you’re like me, once you saw that you missed the spectacular run-up in Alimentation Couche Tard Inc. (TSX:ATD.B) shares, you have stayed on the sidelines due to the valuation.

Historically, a consumer staples name like this one has traded at much lower multiples than it has been trading at in recent years. Back in 2015, the stock was trading at 33 times earnings; in 2016, it was trading at 29 times; it is currently trading at 26 times this year’s expected earnings.

The stock has pretty much flat-lined since the middle of 2015, and this has brought multiples down. This has investors thinking that this might be a good time to get into the stock that everyone talks so highly of. But is it really a positive thing for investors who want to get into the stock?

While I do believe in investing for the long term, and I’m generally not phased by disappointing quarterly results, Alimentation Couche Tard has made me nervous for some time now largely due to its valuation. It’s clear to me that the stock was trading ahead of itself recently, and that is why — despite the strong results it has posted over the last two years — the stock pretty much did nothing. This is a bad sign in and of itself and shows the stock and the market have gotten ahead of themselves.

There is no denying that management has done a tremendous job growing the company and doing so profitably, and with good returns for shareholders. In short, they have been good stewards of our capital. But, the question is, how long can this aggressive acquisition strategy move so fast? And are expectations that are baked into the stock a little too optimistic? I think there are signs that the company and the stock are due for a breather and that the current weakness in the stock price is not a buying opportunity.

Disappointing results, a growing debt burden (the debt-to-total-capitalization ratio is over 40% at this point), and the recent reorganization of Metro’s Alimentation Couche Tard holdings all signal that the risk on this stock has risen, and with valuations still high, and a balance sheet that is getting stretched and is not as able to support further acquisitions, I would wait for a sharper pullback in the stock before thinking about investing in this name.

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Fool contributor Karen Thomas has no position in any stocks mentioned. Alimentation Couche Tard is a recommendation of Stock Advisor Canada.

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