Alimentation Couche-Tard (TSX:ATD) stock rose 30% in 2023. That return soundly beat the S&P/TSX Composite Index by nearly 20 percentage points. With its stock up 138% over the past five year, the company has had a strong run. However, investors need to ask whether it remains a good buy today?
What does Couche-Tard do?
Undoubtably, Alimentation is an exceptional business. It operates a 14,425-site network of convenience stores and gas stations. These largely operate under the Couche-Tard, Circle K, and Ingo brands.
While gas stations and C-stores are not exactly the most profitable businesses (or exciting), Couche-Tard’s attractive brand, global strategy, large network, and economies of scale are a huge differentiator.
How does it grow?
The company has been very good at acquisitions. It has added scale in the U.S., Europe, and Asia by buying large portfolio carveouts and smaller regional brands. Last year, it announced the major acquisition of 2,200 stores in Germany, the Netherlands, Luxembourg, and Belgium from TotalEnergies.
Despite its already large portfolio, Couche-Tard continues to have a large market to consolidate. In the U.S. alone, 70% of its convenience stores are owned by single operators or smaller chains. That means there is still substantial room for large-scale operators to acquire in regions.
Organic growth continues to be a substantial part of overall returns. Couche-Tard is expanding both its service and product mix. Electric vehicle charging stations, business-to-business fuel relationships, fresh and fast-food options, larger drink optionality, private value brands, grocery items, and digital advertising are all catalysts for longer-term organic growth.
Improving profits and strong returns on capital
By expanding unit optionality and portfolio scale, the company can become more profitable. Net profit margins have doubled over the past 10 years, and they continue to trend upward.
Couche-Tard continues to be a good capital allocator. Return on invested capital has trended between 10% and 14%, with recent years closer to 14%.
This essentially means the company can earn 10-14 cents on every dollar it invests per year. The more Couche-Tard can continue to invest at that elevated rate, the better it can continue to compound shareholders capital.
Right now, Couche-Tard has its goals set on growing EBIDTA (earnings before interest, depreciation, tax, and amortization) to $10 billion by 2028. Last year, it earned $5.8 billion, so it is looking to almost double (at an 11.7% compounded annual growth rate) over the next five years.
Not a bargain, but not overly pricey
Despite its solid run-up last year, Couche-Tard looks reasonably priced. It trades with a price-to-earnings (P/E) ratio of 18. That is relatively in line with its 10-year average.
Likewise, it has an enterprise value-to-EBITDA ratio of 12. That is just slightly above its 10-year average. The point being, it is neither cheap nor expensive. If the company can continue to grow at a low-to-mid-teens rate, the valuation is justified.
However, there are headwinds to consider. Cigarette sales are in decline, fuel margins are falling, and consumers are pulling back spending. Likewise, there is always the fear of electric vehicles making gas stations obsolete.
The Foolish takeaway on Couche-Tard
Considering its valuations and some potential headwinds, I would not call Alimentation Couche-Tard’s stock a bargain. Stock returns are likely to be aligned with its growth trajectory (likely low teens), as it is unlikely to see significant growth in its valuation multiple from here. If you like the business and can hold for the long-term, it is probably an okay buy today.
