This Canadian Blue Chip Is Trouncing TSX Returns, and It Still Has Room to Run

Alimentation Couche-Tard (TSX:ATD) stock looks quite frothy heading into earnings, but there may still be upside.

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As the Canadian stock market looks to break through its multi-year ceiling of resistance, investors may be wondering which names to consider now that there’s a bit of momentum behind some of the more battered names on the TSX Index.

Athough the AI trade is long overdue for a pullback or near-term correction, at least in my humble opinion, investors shouldn’t get in any sort of panic as tech goes from leading to lagging.

In this piece, we’ll focus on a top Canadian blue chip that’s well-equipped to continue outpacing the TSX Index, perhaps at an accelerating rate from here.

Without further ado, enter shares of Alimentation Couche-Tard (TSX:ATD), a convenience store firm that I’ve been incredibly upbeat about over the past several quarters. In a prior piece, I remarked that the latest near-5% dip from all-time highs was a great opportunity for long-term investors to top up.

Indeed, it would have been nice to have a 10-15% dip. But a “half-correction” of around 5% may be the best that Mr. Market can do as the TSX Index looks to roar higher as the broad stock market rally begins to broaden beyond just tech stocks. Should investors finally jump into Couche-Tard? Or just wait until after the firm reports its latest results? Let’s dig deeper.

Couche-Tard stock: It’s been a rather rewarding past few years for investors

Indeed, profit-takers in those red-hot shares of Alimentation Couche-Tard are likely kicking themselves as they continued traveling steadily higher through macro headwinds and the inflationary hurricane that’s lasted for more than two years now.

With a rich history of making very well-timed (and well-priced) deals in the convenience retail scene (think CST Brands, Topaz, and the retail assets of TotalEnergies), the company has found a way to keep the growth going strong despite its now lofty size (it now boasts a huge $80.6 billion market cap), perhaps comparable to some tech firms.

The company’s Q2 2024 earnings results were impressive, with $819.2 million in net earnings. With Q3 results coming up very soon (later this week), investors should consider buying if shares dip after less-than-stellar results.

Earnings are looming: Could a bigger pullback be in the cards?

Though it’s tough to tell what the coming results will hold, I think it’s safe to say that there’s a lot of expectation baked into ATD shares right here. Even with the mild dip (now down around 4% from its highs), the stock is still up over 37% in the past year and over 125% in the last five years.

Amid the scorching-hot run, the stock has seen its price-to-earnings (P/E) ratio swell. Today, it’s flirting with the 20 times trailing P/E level. Though I believe ATD stock deserves such a multiple, I don’t think it’ll leave much room for error if Couche-Tard falls short or guides more cautiously in future quarters.

Either way, I’d be more comfortable punching my ticket if shares were to return to the 18-19 times trailing P/E range. In short, Couche-Tard looks mildly expensive and poised for a potential dip toward the $80 per share range, perhaps at some point over the coming months.

Bottom line

In any case, Couche-Tard is a great long-term earnings growth play as the company expands further across North America and Europe. With incredible cash flows and a robust balance sheet, it’s tough to overlook the name should it stumble.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has positions in Alimentation Couche-Tard. The Motley Fool has positions in and recommends Alimentation Couche-Tard. The Motley Fool has a disclosure policy.

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