When it comes to growth stocks, one can expect to pay a hefty premium multiple versus that of low-growth value stocks. In the case of Alimentation Couche-Tard Inc. (TSX:ATD.B) however, you’re getting a growth stock that can expect to see high double-digit percentage growth over the foreseeable future along with a very high growth ceiling.
Looking at the longer-term chart of Couche-Tard stock, it appears to be a classic case of stagnated growth, as shares have flat lined over the past three years before a multi-year bull run. But this is simply isn’t the case. In fact, the convenience store industry is still ridiculously fragmented. And when you consider the possible global M&A opportunities, the valuation at current levels is so absurdly attractive that one would think that the industry had reached its growth limits.
Why is the stock so cheap?
The last quarter was supposed to be one for the record books, as many analysts had very high hopes. Due to low fuel margins and a barrage of seemingly one-time issues, however, the quarterly results were deemed disappointing. To me, it appears that investors are beginning to lose patience with this formerly high-flying stock.
I think those who can keep their patience have the opportunity to capitalize on what appears to be one of the best entry points in recent memory. With analyst expectations brought back down to earth, Couche-Tard is now better-prepared to surprise everybody to the upside at some point down the road. The Q3 fiscal 2018 adjusted EPS was essentially in line on a year-over-year basis; while they may be indicative of stagnated growth to some, one must consider the perfect storm of headwinds that I believe has dampened the results, causing many growth investors to look elsewhere.
Couche-Tard stock now trades at a 13.7 forward P/E, a 3.3 P/B, a 0.5 P/S, and a 12 P/CF, all of which are remarkably lower than the company’s five-year historical average multiples of 21.9, 4.6, 0.6, and 14.3, respectively. The dividend yield, although nothing to write home about, is ~80% higher than it’s been over the past five years. After the next big annual hike, the dividend will likely surpass the 1% mark, potentially hitting a new all-time high.
Make no mistake: Couche-Tard is still a growth story. It’s just hit a roadblock that appears to be temporary, although the overblown post-earnings sell-off implies that it is now a stalwart with minimal growth and a very underwhelming dividend.
A low-growth stalwart with a meagre dividend?
That’s not at all attractive to anyone, especially given the lack of capital appreciation over the last three years. That’s quite a long while to flat line, and while it’s forgivable for some investors to dump the stock, I think those who stand by it will be the ones that will come out ahead over the really long-term.
Looking ahead, the company is poised to realize additional synergies from its recent acquisitions as cash goes back to pay off debt and perhaps finance a larger-than-average dividend increase as an incentive to investors to stick with the stock.
If you’re looking for a huge margin of safety, Couche-Tard is a fantastic value pick today. I think a generous dividend hike could be in the cards. Thus, I believe the excessive post-earnings pessimism is blown way out of proportion.
Stay hungry. Stay Foolish.
