Alimentation Couche-Tard Inc. (TSX:ATD.B) and Maple Leaf Foods Inc. (TSX:MFI) are still trading around 52-week lows, with Couche-Tard trading 18% lower than in January of this year and Maple Leaf trading 14.5% lower than January levels.
So you might well ask, so what?
Well, these stocks are trading at major bargain prices, and probably won’t be for long.
A few themes spring to mind.
Interest rates are rising
With interest rates rising, we will witness the more richly valued — or should we say overvalued — stocks get beaten down the most.
Trading at lows, these two stocks are anything but overvalued.
Make no mistake: interest rates are rising.
Despite the fact that Bank of Canada took a pause at their latest meeting, we know that U.S. interest rates are clearly on the rise, with the Federal Reserve raising the target range for the federal funds rate by a quarter of a percentage point to 1.5% to 1.75%, and signaling steeper hikes to come in 2019 and 2020.
Here in Canada, we can expect more of the same.
Investors becoming more risk averse
If indeed the investor is becoming more risk averse, then steadier companies/stocks that are providing an “essential” product or service will have more staying power and shareholder value, such as defensive stocks like Maple Leaf Foods.
Maple Leaf Foods has been creating shareholder value for a long time now. In fact, the stock’s 10-year return is a healthy 213%, and the company’s history has been of increasing profitability, increasing dividends (+175% growth in dividends over the last three years), and share buybacks, and ultimately creating shareholder value.
Strong fundamentals
Notably, at the end of the day, both of these companies continue to deliver top-notch results, with good, low risk growth ahead of them.
With a global network of 10,000 stores globally, Alimentation Couche-Tard has a history of profitable growing, both organically and through acquisitions.
Strong cash flows is one of the key characteristics of the company’s business model, as is demonstrated by the company’s free cash flow generation of over $900 million in the last three years, its 17% five-year compound annual growth rate in free cash flow, and a respectable free cash flow margin of over 2%.
Thus, although the debt to total capitalization ratio remains high, at 54%, the company’s strong cash flow generation can easily support this.
Going forward, we can expect continued synergies from the company’s recent acquisitions, as well as deleveraging of the balance sheet.
And current valuation is more attractive than it has been in a long time, with the stock trading at a P/E ratio of 24 times last year’s (2017) earnings and 20 times this year’s expected earnings.
