On today’s Breakouts report, there are six stocks on the positive breakouts list (stocks with positive price momentum), and 147 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that entered correction territory and surfaced on the negative breakouts list - Alimentation Couche-Tard Inc. (ATD.B-T).
On Nov. 18, the share price closed at a record high of $52.30. However, the share price has since tumbled 12 per cent, closing below $46 on Dec. 1. The stock is currently trading at an attractive valuation with a price-to-earnings (P/E) multiple of 14.7 times the fiscal 2023 consensus earnings estimate, well below its historical average multiple. The stock has a 12-month forecast return of 24 per cent and 13 buy recommendations.
A brief outline on Couche-Tard is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Quebec-based, Alimentation Couche-Tard is a leading convenience store operator with operations worldwide. As at Oct. 10, the company had 9,199 convenience stores in North America and 2,727 stores in Europe. The company also has more than 1,900 stores operated internationally under licensing agreements in 14 countries and territories including Egypt, Indonesia, Jamaica, Mexico, New Zealand, Saudi Arabia, and the United Arab Emirates. The company’s core banners are Circle K, Couche-Tard and Ingo.
In the second quarter of its fiscal 2022 (that ends in April), 66 per cent of total revenue stemmed from the U.S., 20 per cent from Europe and other regions and 13 per cent from Canada.
There is seasonality in the company’s earnings with the lowest earnings traditionally reported in its company’s fourth-quarter.
In a few weeks, the dual-class share structure will no longer exist. Effective Dec. 20, Class B shares will be delisted and converted on a one-for-one basis so that all shares trade under one class.
Investment thesis
- Seasoned management team with a proven track record.
- Delivered earnings growth over the years. The company reported adjusted earnings per share of 33 US cents in fiscal 2011, 40 US cents in 2012, 56 US cents in 2013, 68 US cents in 2014, 90 US cents in 2015, US$1.04 in 2016, US$1.11 in 2017, US$1.30 in 2018, US$1.66 in 2019, US$1.97 in 2020, US$2.45 in 2021 and US$1.35 in the first half of fiscal 2022.
- Consolidator in a highly fragmented industry. Couche-Tard’s U.S. market share is approximately 5 per cent.
- Very healthy balance sheet. At quarter-end, the leverage ratio (net debt-to-adjusted EBITDA) was a conservative 1.23 times. This provides management with amble financial flexibility to fund future acquisitions.
- Attractive valuation.
- Potential risks: The company faces challenges/headwinds including: 1) labour turnover and shortage of workers; 2) supply chain challenges; 3) rising cost pressures; 4) lower fuel volumes as people stay at home and drive less often.
Quarterly earnings
After the market closed on Nov. 23, the company reported second-quarter fiscal 2022 financial results that were just shy of expectations.
Adjusted earnings per share came in at 65 US cents, below the consensus estimate of 67 US cents per share. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was US$1.277-billion, falling slightly short of the Street’s forecast of US$1.287-billion. Same-store merchandise sales expanded 1.4 per cent in the U.S., rose 3.9 per cent in Europe, but decreased 2.1 per cent in Canada. In the U.S., fuel gross margin jumped to 36.39 cents per gallon, which management attributed to “a favourable competitive landscape and a strong sourcing efficiency.” Return on equity and return on capital employed stood at 21.2 per cent and 15.1 per cent, respectively.
Despite, the modest earnings miss, the share price dived. The following trading day, the share price fell 4.6 per cent on high volume with over 6.8-million shares traded, above its three-month historical daily average trading volume of approximately 4.5-million shares.
Management has been successfully navigating its operations in a very challenging environment.
On the earnings call, president and chief executive officer Brian Hannasch said, “Like our peers across the retail and convenience landscape in North America, we continue to face unprecedented labor and supply chain challenges this quarter. No doubt, this is the most difficult labor market in recent history and certainly in my career. As we’ve been working hard to mitigate the situation, we’ve instituted hiring and retention initiatives, including bonuses and other offers, increased recruitment capacity and pipeline visibility across the network. We’ve also focused more intensely on training and engagement to be a recognized an employer of choice. After meeting our summer goal of hiring over 20,000 store team members this year, we’re starting to see some stabilization and our efforts have ensured business continuity and success. Unlike a lot of other retailers, we remain open for business and ready for our customers. Labor shortages also impacted the supply chain across the industry, particularly in the U.S., from shortages of truck drivers to warehouse staffing issues with our suppliers. Our vendors have also experienced significant disruption in receiving raw materials, causing delays in production.”
Historically, the company has grown largely through acquisition growth (around 70 per cent acquisition growth and 30 per cent organic, or internal, growth). Going forward, management targets its growth to be around 60 per cent organic and 40 per cent from acquisitions.
When asked on the earnings call about acquisition opportunities and valuations, Mr. Hannasch said, “I’m cautiously we’ll get some deals done in the coming quarters but I always say we remain disciplined in our approach. We have a clear set of criteria for the assets we’re looking at, and we’ll continue to strive to do the right thing for the shareholders. In terms on valuations, they range widely depending on the asset quality, but have remained surprisingly elevated given a lot of the challenges that we’ve all experienced with COVID.”
Returning capital to shareholders
In November, the company announced a 26-per-cent dividend increase. The company hiked its quarterly dividend to 11 cents per share, or 44 cents per share on a yearly basis. This equates to an annualized yield of 0.96 per cent.
During the second-quarter, the company repurchased 6,351,895 shares as part of its share buyback program. In fiscal 2021, the company repurchased more than 33-million shares for $1-billion.
Analysts’ recommendations
There are 16 analysts that actively cover this consumer staples stock, of which 13 analysts have buy recommendations and three analysts have neutral recommendations.
The firms that provide recent research coverage on the company are: ARC Independent Research, Barclays, BMO Nesbitt Burns, Canaccord Genuity, CIBC Capital Markets, Desjardins Securities, Eight Capital, Goldman Sachs, JP Morgan, National Bank Financial, Raymond James, RBC Dominion Securities, Scotia Capital Stifel Canada, TD Securities and Veritas Investment Research.
Revised recommendations
In November, five analysts changed their target prices.
- CIBC’s Mark Petrie to $57 from $59.
- JP Morgan’s John Royall to $59 from 54.
- National Bank’s Vishal Shreedhar to $53 from $56.
- RBC’s Irene Nattel to $73 (the high on the Street) from $65.
- Stifel’s Martin Landry to $49 from $54.
Financial forecasts
Low earnings growth is forecast for the company. The consensus earnings per share estimates are US$2.37 in fiscal 2022 and US$2.45 in fiscal 2023.
The consensus earnings estimate has increased for fiscal 2022 but declined, albeit only slightly, for fiscal 2023. Four months ago, the Street was forecasting earnings per share of US$2.25 for fiscal 2022 and US$2.49 for fiscal 2023.
Valuation
The stock is not expensive relative to historical levels.
According to Bloomberg, the stock is trading at price-to-earnings (P/E) multiple of 14.7 times the fiscal 2023 consensus estimate. This valuation is below the stock’s historical seven-year average P/E multiple of 16.9 times.
In February of 2020, when news of the coronavirus sent equity markets plunging, this stock’s P/E multiple fell to 14 times so the share price may soon find support given that the stock’s current valuation is not far from this level.
The average 12-month target price is $57, implying the stock has 24-per-cent upside potential over the next year. Individual target prices are as follows in numerical order: $45 (from Barclays’ Karen Short), $49, $51, $53, $55, $56, $57, three at $58, three at $59, two at $61, and $73 (from RBC’s Irene Nattel).
Insider transaction activity
On Nov. 26, director Eric Boyko invested over $117,000 in shares of the company. He purchased 2,500 shares at a price per share of $46.99.
Mr. Boyko is also the co-founder, president and chief executive officer of Stingray Group Inc. (RAY.B-T).
Prior to that, on Oct. 19 and 20, director Jean Bernier exercised his options, receiving a total of 130,000 shares at a cost per share of $7.9333, and sold 130,000 shares at an average price per share of approximately $48.01 with 31,126 shares remaining in this particular account. Net proceeds totaled over $5.2-million, not including any associated transaction fees.
Chart watch
The stock has entered correction territory.
A few weeks ago, this stock was on the positive breakouts list with the share price closing at a record high of $52.30 on Nov. 18. Since then, the share price has tumbled 12 per cent, closing below $46 on Dec.1.
Year-to-date, the share price is now up by just 6 per cent, lagging the S&P/TSX composite index as well as the S&P/TSX consumer staples sector index, which have gains of 17 per cent and 9 per cent, respectively.
The stock is nearing oversold territory. The relative strength index (RSI) is at 34. Generally, an RSI reading at or below 30 reflects an oversold condition.
Looking at key technical support and resistance levels, there is initial support between $45 and $46, near its 200-day moving average (at $45.78). Failing that, there is support around $40. There is major resistance around $52.
Between mid-2015 and the end of 2018, the share price traded sideways, largely between $26 and $35. In the near-term, once the share price stabilizes, it may trade in another sideways pattern, but this time between $46 and $52, until the company’s earnings growth expectations accelerates.
This report is not an investment recommendation. The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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Jennifer Dowty