Alimentation Couche-Tard (TSX:ATD) is a Canadian gas station company that owns the Couche Tard, Circle K, and Ingo. The company has been making headlines lately for its attempted takeover of Japan’s Seven & I. Seven & I is the company that owns 7-Eleven — the largest convenience store chain in the world.
Alimentation Couche-Tard stock has done quite well over the years. The stock has risen 11,000% since it was listed in 2001, and 155% in the last 10 years. Both of these outcomes were well ahead of the TSX Index in the same timeframe.
Why has ATD stock fallen lately?
ATD stock has been falling in price for over a year. This is pretty disappointing, given that the TSX has risen in the same timeframe. So, we should investigate the reasons for the selloff.
One reason has to do with the 7-Eleven deal. ATD is offering $47 billion to buy that company, which is a far larger sum than the company has ever spent on a deal. The large price tag will entail significant borrowing if the deal closes. It will result in a high debt-to-equity ratio, as the company currently has $20.6 billion in equity, far less than the amount that will be spent buying Seven & I.
Debt itself isn’t always a problem. When used sensibly, it can boost returns. The problem is that Alimentation Couche-Tard’s typical strategy has been to exercise fiscal discipline and “bootstrap” acquisitions mainly through reinvested earnings. This 7-Eleven deal looks like a departure from ATD’s traditional approach.
Disappointing releases
A second problem with Alimentation Couche Tard lately has been a series of disappointing earnings releases. In the most recent quarter, it delivered the following:
- $10.9 billion in revenue, up 6.6% year over year.
- $15.4 billion in fuel revenue, up 7.6%.
- $5.3 billion in merchandise revenue, up 5.5%.
- $641 million in earnings, up 2.6%.
It wasn’t a terrible showing. Compared to analyst estimates, revenue missed expectations while earnings narrowly beat. The problem, though, is that there was little growth. Also, margins were razor-thin. ATD missed expectations in three out of the last four quarters. So, there could be issues here.
Valuation
Going by valuation multiples, ATD is a pretty typical TSX stock. At Friday’s closing price, it traded at the following:
- 18.5 times adjusted earnings.
- 17.7 times reported earnings.
- 0.6 times sales.
- 3.2 times book.
- 9.6 times operating cash flow.
The TSX Index currently trades at about a 21 price-to-earnings ratio. So, ATD is a little cheaper than average, ignoring growth prospects. Its earnings are down in the trailing 12-month (TTM) period — another issue to keep an eye on.
Foolish takeaway
Overall, I think that Alimentation Couche-Tard stock is a sensible buy today. The stock is not exactly dirt cheap, but it is cheaper than average, and the company’s recent earnings downturn should reverse with fuel prices rallying like they have been lately.
As for the 7-Eleven deal, I think ATD is overpaying or at least offering too much money for that company. However, I’m not so convinced that the deal will close. A Canadian company’s attempt to buy out a major Japanese competitor has, as you might expect, drawn some ire from Japanese regulators. They might just scuttle the 7-Eleven deal before it closes. So, ATD might not end up saddled with debt after all.
