There aren’t that many truly “wonderful” businesses out there trading at reasonable prices. Though market valuations have stretched quite a bit since the start of the year, I view names like Alimentation Couche-Tard (TSX:ATD) as nothing short of compelling, even at a fresh all-time high. I’m strongly considering adding to my already sizeable Tax-Free Savings Account (TFSA) position at these levels.
Indeed, Couche-Tard blasted off nearly 2% during Thursday’s somewhat muted session of trade. At around $69 per share, the stock is at new heights. And I think even higher highs could be in the cards as we head into the second half.
Undoubtedly, recession headwinds have rattled many TFSA investors, causing some to ditch growth for value. With growth in relief mode, and value taking a backseat again, questions linger as to what the second half of 2023 could hold. Either way, I think Couche-Tard has demonstrated its earnings resilience. It’s been through an inflation storm and macro setbacks, only to blow away the analyst estimates.
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Couche-Tard stock: The closest thing to perfection in my portfolio
Though it’s tough to label any investment as “perfect,” I think Couche-Tard is pretty close to it, especially in today’s rocky and volatile environment. If you look at the three-year chart, it’s hard not to love the stock. Shares have risen in a steady upward fashion. While there have been occasional bumps in the road, the trend is clear: higher highs. Better yet, the stock rally hasn’t really caused the price-to-earnings (P/E) multiple to swell.
There are two metrics that go into the widely followed P/E ratio: price and earnings. As a stock price moves higher, earnings will need to rise accordingly to keep the P/E ratio from swelling. If earnings growth outpaces the pace of stock appreciation, you could have a bit of compression on that ratio.
When it comes to Couche-Tard stock, earnings and price appreciation have been on the same page. That’s a major reason why the stock’s P/E ratio (currently 17.1 times trailing) isn’t that much more expensive than its five-year historical average of around 16.3 times.
As the Canadian economy finds its footing again, I’d look for earnings to keep going strong, all while the brilliant management team considers the broad range of merger and acquisition opportunities it could take advantage of with its impressive liquidity position.
Couche-Tard’s strong liquidity position could help it seize opportunities
The current ratio is an impressive 1.1, and the stock has a modest 0.75 debt-to-equity ratio. Indeed, there’s room for more deals. And I think that’s what we’ll get over the next three years.
Couche is in solid financial health, and its earnings have the means to lay the groundwork for further gains in the stock. Sure, no company is “perfect,” but it’s tough to find a TSX stock that’s as impressive as Couche-Tard at these levels. Over the past three years, the company has averaged 10.4% in operating income growth. That’s impressive for a company going for less than 20 times P/E!
Further, even a “perfect” company can cause one’s TFSA to lose money if the price isn’t also in the right spot! Fortunately, I think ATD stock is still undervalued at just shy of $70.
