Stifel and Others Stifel analyst Martin Landry thinks Alimentation Couche-Tard Inc.’s plan to double its earnings per share over the next five years is “well-constructed” and sees upside potential to its targets for fiscal 2028.
On Wednesday, the Montreal-based company introduced a plan to increased its earnings before interest, taxes, depreciation and amortization (EBITDA) by an annual rate of 12 per cent over the next five years, reaching $10-billion. That exceeds Mr. Landry’s previous estimate of $8.7-billion while falling largely inline with investors’ expectations, according to his recent buyside survey.
“In our view, this plan is credible and achievable but will require a strong execution given the targets established,” said Mr. Landry. “The Circle K brand has grown in awareness and made significant inroads from a small regional brand to a unified global brand. This rising awareness should create value overtime, helped by the introduction of the loyalty program. ATD has the potential to double its EPS in the coming five years, which, combined with a low risk profile and liquid shares, makes Couche-Tard a core holding for Canadian and global portfolio managers, in our view.”
“Couche-Tard expects future acquisitions (including TotalEnergies), to contribute near $2 billion with the remaining growth or $2.24 billion coming from several organic initiatives, which we break down below. Management has a good track record having met or exceed its previous two 5-year plans, increasing our confidence in ATD achieving its target.”
The analyst pointed to three potential downside risks to the target: the “aggressive” cost-cutting expectations with “impressive” expected cost savings of $800-million; risks surrounding fuel demand “especially given the economic slowdown occurring” and the “inherent uncertainty” surrounding the timing of M&A activity.
“Amongst the initiatives and assumptions discussed during the presentations, we see two main areas where there could be upside: (1) The U.S. fuel margin assumption of low $0.40s per gallon appears conservative given that ATD realized $0.47 per gallon in FY23 In addition, there are several sites which have not converted their fuel pumps to the Circle K brand yet, providing further upside from FY23 levels, in our view. (2) We also see upside from the expected increase of $200-million in EBITDA coming from Couche-Tard’s new loyalty program, ‘Inner Circle’. It provides very valuable customer data, enabling ATD to personalize the customer experience and ultimately drive traffic, increase basket size and foster customer loyalty,” he said.
After raising both his fiscal 2025 EPS projection by 7 per cent to $3.47 (from $3.23) and his long-term gasoline margin assumption, Mr. Landry increased his target for Couche-Tard shares to $85 from $81, keeping a “buy” recommendation and touting its “reasonable” valuation. The average target on the Street is $84.94, according to Refinitiv data.
“ATD’s shares trade at approximately 16 times forward earnings, slightly lower than the 5-year average,” he said. “ATD has a better balance sheet than historically with an expected leverage of 2.1 times debt/EBITDA post the closing of the TotalEnergies acquisition, which provides flexibility to make further M&A transactions or return capital to shareholders.”
Elsewhere, others making target adjustments include:
* National Bank’s Vishal Shreedhar to $86 from $81 with an “outperform” recommendation.
“Overall, we found the investor day to be a reiteration of themes that management has previously discussed, though guidance exceeded expectations,” said Mr. Shreedhar. “Specifically, the company announced its 10 for the win 5-year strategy wherein it outlined its $10 billion EBITDA target by F2028, which we believe is ambitious. That said, at this stage, even if ATD falls slightly short, we would consider it to be a positive outcome, considering a favourable growth gap vs. other large cap staples in our coverage.”
* Scotia’s George Doumet to $87 from $82 with a “sector outperform” rating.
“We walked away from the investor day with a sense that while to ‘almost’ double again may sound like an ambitious feat, many of the initiatives underway have been in motion for several years already,” said Mr. Doumet. “In our view, some areas of the plan might prove conservative (M&A and fuel), while others might require long-term fine-tuning (loyalty, FFF and beverage). All in all, we expect growth to be slightly back-half weighted (including loyalty, but with opex savings earlier on).”