Shares of Alimentation Couche-Tard (TSX:ATD) have been on a respectable run of late, surging steadily higher over for more than two years now. It’s been a powerful rally, and one that could still have legs, as the company continues to grow its earnings at a spectacular pace.
Earnings always matter, but these days, investors value real profits more than promises of profits in the distant future. You see, the further one needs to look into the future, there more uncertainty there will be, and the lower such future profits will be with every interest rate hike.
Couche-Tard: Back in the outperformers list!
Undoubtedly, we’ve witnessed a drastic shift across “flavours” of equities. Speculative growth and zero profits are out. Predictable growth in the present (and future) are in — big time. Further, robust cash flows and strong balance sheets are worth that much more to investors these days. When rates are high, the value of staying liquid is that much more important.
When it comes to balance sheets and earnings-growth trajectories, Couche-Tard is a star. It deserves a gold medal, in my opinion, for not getting too active in late 2020 or 2021, when cash was easier and calls for growth were loud!
These days, we’ve seen a deviation between firms like Couche and other firms that aren’t capable of such predictable cash flow growth. Even after a hot run, Couche stock isn’t what you’d consider an expensive or even fully valued stock.
Shares go for 17.82 times trailing price to earnings (P/E). That’s reasonable for the type of predictable earnings growth you’re getting. When you factor in the strong balance sheet and management’s knack for hitting home runs when it comes to acquisitions, I’d argue the stock remains too cheap, even after a 77% pop off its 2021 lows.
Couche-Tard: Brilliant managers deserve a higher premium multiple!
I’ve praised Couche-Tard’s management many times in the past. And I’m going to applaud them once again. The company has been so incredibly prudent with its acquisition strategy. It’s like a tiger waiting for the perfect moment to pounce.
This year, the firm finally pounced on a multi-billion-dollar deal with TotalEnergies’s gas station assets. The deal’s tab was modest at US$3.3 billion. With 2,000 new stations to help contribute to earnings growth and potential synergies Couche-Tard can apply, I’d argue Couche-Tard has the gas it needs to power a move past $80 per share.
Indeed, the easy money has already been made. But that does not mean Couche-Tard doesn’t have the means to extend its hot streak. Unlike the hot stocks that skyrocketed into the stratosphere back in 2021, Couche-Tard has actual financial results to back itself up. It has a P/E ratio (it’s still quite low), and it has a plan to keep driving value. It’s these things that hold up rallies, not just promises of growth in the future.
With that in mind, I think the environment suits Couche-Tard very well. Even if rates pause and fall from here, Couche-Tard will be busy doing what it does best: creating value for investors, whether it be through mergers and acquisitions or other efforts. I’m a huge fan of the business and will continue to add on any modest dips.
