Alimentation Couche-Tard Inc. shares don't reflect its strong earnings and deserve to be trading higher, TD Newcrest analyst Michael Van Aelst said, as he hiked his 12-month target price to $38 from $34.
North America's second-largest independent convenience store operator just beat expectations with quarterly earnings of 34 cents a share, boosted its dividend 25 per cent to 6.25 cents a share, and has delivered 20-30 per cent earnings growth in each of the past two years.
"With this in mind, we remain surprised by the company's arguably modest valuation," Mr. Van Aelst wrote in a research note titled When Will The Market Pay For Such Strong EPS Growth? The stock traded at less than 13 times forward earnings per share before the earnings were announced on Tuesday.
"With another year of substantial growth under its belt, a strong outlook, return on equity consistently greater than 20 per cent, free cash flow yields of 8-10 per cent, and a clean balance sheet that can easily support additional accretive acquisitions, we believe that ATD's valuation will soon return to its historical averages of 14-15 times forward EPS, which would only bring it in line with Casey's General Stores, despite Couche-Tard's superior EPS growth, balance sheet and geographic diversification," he said.
Mr. Van Aelst rates Couche-Tard "action list buy" and ranks it as his top pick.
"ATD shares have appreciated 50 per cent since we upgraded to Action List Buy in July 2010 and we believe that there is still substantial upside remaining." He expects earnings growth of 15 to 20 per cent over the next several years and additional acquisitions that will further strengthen the bottom line.
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