CIBCAlimentation Couche-Tard Inc. (ATD-TSX) — Outperformer
Company Profile
Alimentation Couche-Tard Inc. is the largest Canadian
convenience store owner and operator, and the largest in the
U.S. by company-owned stores. The company operates globally
under three main brands: Circle K, Holiday and Couche-Tard.
Investment Thesis
Couche-Tard has multiple initiatives in both merchandising –
notably dynamic pricing/assortment, fresh food, and loyalty – and
fuel – trading, hauling, and Circle K brand – as well as unit
growth, that we expect will support above-industry organic sales
growth and margin realization. Though management has
expanded its scope for M&A, we expect c-stores will remain the
primary focus. Most importantly, management has a strong track
record of creating shareholder value. The strong balance sheet
leaves the company well positioned for opportunities and, in the
meantime, share buybacks will be active. Electric vehicle
adoption is a longer-term concern, but critical penetration is well
in the distance and ATD has Norway as its testing ground.
Price Target (Base Case): C$56.00
We apply a 21x P/E multiple to our F2023 EPS estimate to
account for an incredibly strong balance sheet (~1x net
debt/EBITDA using pre-IFRS 16 standards) and M&A potential.
We normalize for long-term fuel margins of 26¢/gallon.
Upside Scenario: C$68.00
Our upside scenario assumes modestly superior organic growth
across all regions. We increase merchandise SSS by 100 bps
every quarter and merchandise margins by 50 bps relative to our
base case. We do not make any changes to fuel SSV or fuel
margin assumptions. We apply a higher P/E multiple (24x) to our
F2023 EPS estimate, and normalize for long-term fuel margins.
Downside Scenario: C$28.00
Our downside scenario assumes more modest organic growth
across Couche-Tard’s network. We decrease SSS and SSV by
100 bps across all regions, merchandise margins by -25 bps
relative to our base case, and lower U.S. fuel margins to 20 cents
per gallon. We also increase organic operating expense growth
by 50 bps higher than our base case. We reduce our P/E multiple
to 19x to account for ATD’s reduced growth, applied to our F2023
EPS estimate, and do not normalize for long-term fuel margins.