Alimentation Couche-Tard (TSX:ATD) is one of Canada’s biggest gas station companies. Best known for Circle K, a former U.S. chain that it bought from ConocoPhillips, it has become a household name. Over the last 10 years, ATD stock has risen 1,500%, thanks to its incredible performance as a business. In its most recent 12-month period, ATD did $16.9 billion in revenue. In 2013, roughly 10 years ago, ATD did $6 billion in revenue. Earnings grew from $229 million to $810 million.
So, ATD’s revenues have nearly tripled in the last decade, while its earnings have nearly quadrupled. The increase in profit was almost 300% over a decade. So we’re seeing pretty strong growth in ATD’s sales and earnings here, though not quite as much as what’s being observed in the stock price. So basically, we have a company that is performing well but whose stock is getting increasingly expensive. In this article, I will explore some factors that could make ATD stock a good buy in March 2023.
Oil prices reasonably high
One factor that could help ATD this year is the fact that oil prices are currently relatively high. ATD makes a large part of its money by selling fuel (mainly gasoline and diesel) at gas stations. This part of ATD’s business is doing very well lately. In the most recent 12-month period, ATD did $12.5 billion in fuel revenue, up 24.3%. That’s a pretty solid showing. In 2022, oil prices rallied, thanks to the war in Ukraine and other factors that held back the global supply of oil. ATD’s fuel sales benefitted from that fact.
We should see similar strength in ATD’s fuel sales this year, though not to quite the same extent as was seen last year. As of this writing, a barrel of WTI crude oil costs US$78. That is pretty high by historical standards. If oil prices hold that level, then gasoline prices should follow suit. Studies show that gasoline prices have a 0.7 correlation with crude oil prices, which is an extremely strong relationship. So, ATD should collect a lot of fuel revenue this year.
ATD stock – A little on the pricey side
Having looked at one bullish factor for ATD, it’s time to look at a different factor that’s a little more bearish:
The stock’s valuation.
At today’s prices, ATD trades at:
- 17 times earnings
- 0.7 times sales
- 3.8 times book value
- 11.5 times cash flow
Now, you might look at this and scratch your head, thinking that the valuation looks pretty low. Compared to the entire universe of stocks, it is, but it’s steep by the standards of gas station companies, most of which are far cheaper than ATD. For example, Suncor Energy trades at just 5.6 times earnings and 4 times operating cash flow. That’s a real bargain compared to ATD.
Foolish takeaway
As we’ve seen, ATD is a solid company with a big catalyst in the form of healthy oil prices. It should do well this year. Its earnings most likely won’t be quite as high as last year’s earnings, because oil prices aren’t as high. However, they should remain higher than they were in most previous years.
