Minor Upgrade Though its shares surged last week after its quarterly earnings report, Desjardins Securities analyst Chris Li expects macro challenges to keep Alimentation Couche-Tard Inc. (ATD-T) “range-bound in the near term.”
“ATD is up 11 per cent since its 3Q results beat on March 15 (3 per cent for S&P/TSX),” he said. “We attribute the outperformance to positive commentary around cost pass-through (fuel and instore),supported by rational competition, a relatively healthy consumer and reopening; limited impact on demand so far from high fuel prices; sustainability of fuel margins; and management’s confidence that growth initiatives will offset any moderation in fuel margins and keep EBITDA stable in FY23 vs FY22, with upside potential.”
In a research report released Monday, Mr. Li said Couche-Tard possesses “attractive” longer-term organic growth opportunities with management targeting 8-10-per-cent annual growth.
“This implies low-double-digit-percentage total shareholder return (TSR) including share buybacks, supported by ATD’s strong FCF and balance sheet,” he said. “We believe the sustainability of structurally higher fuel margins is key. If ATD is successful, we believe low-double-digit-percentage TSR is attractive vs ATD’s valuation of 16.5 times forward P/E. Some of the large-cap Canadian staples (Loblaw, Metro and Saputo) trade at 18–19 times P/E with similar long-term TSR. We recognize that ongoing concerns about energy transition risks and M&A uncertainty will likely keep valuation from exceeding its long-term average of 17 times forward P/E. On M&A, our sense from management is that valuation is becoming more reasonable with potential opportunities in a rising rate environment for highly levered assets.”
Reaffirming his “positive long-term view,” Mr. Li raised his target for Couche-Tard shares by $1 to $60, keeping a “buy” recommendation. The average is $60.74.