November 14, 2022
Alimentation Couche-Tard Inc.
Lot of gas left in the tank: ATD a top pick with potential upside to both earnings and valuation
Our view: Reiterating our constructive view on ATD ahead of FQ2 results (Nov 22 AMC). Longer term, favourable outlook underpinned by in- store initiatives, fuel margin sustainability at levels well above C19 and demonstrated resilience through recessions, augmented by a rapidly improving M&A backdrop and ~$15B in B/S capacity.
Key points:
FQ2 Preview (conference call Nov 23): Forecasting EBITDA/EPS $1.484B/ $0.83, above consensus $1.418B/$0.78, but many estimates not yet updated to reflect strong fuel margins during the quarter.
• Detailed forecasts, conference call information in exhibits 1-3. Of note: i) Upside bias to estimates based on conservatism embedded in our fuel profitability forecasts; latest industry data available in our Pulling up to the Pump publication; ii) FX a headwind on reported results: European currencies down in the mid-to-high teens range on average Y/Y relative to USD, CAD down ~4% Y/Y. The impact is purely one of translation, ATD operations generate revenue/incur costs in local currencies.
Price target +$1 to $80. Against the backdrop of elevated rates and growing economic uncertainty, we favour staples/staples-like names that perform across the cycle and that enjoy stock-specific optionality. Favourable longer-term outlook predicated on:
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Significant earnings growth potential inside the box driven by initiatives to capitalize on industry trends and capture share of wallet. ATD continues to ramp up store openings and deploy initiatives with a focus on optimizing promo activity, local assortment, and labour hours. We are especially constructive on the Fresh Food, Fast program ability to drive sales, the cost and experience benefits from the rollout of Smart checkout technology at 7k stores over the next 3 years.
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Our call around fuel margin sustainability significantly above C19 levels based on observations, both at the industry level: i) MSD structural demand destruction due to new work paradigm, ii) elevated, albeit normalizing fuel prices driving credit card fees, iii) opex inflation, and specific to ATD: i) procurement initiatives, notably the JV with Musket, the benefits of which amplify in times of price volatility, ii) gross profit benefit of Circle K rebranding. Importantly, assuming an unexpected unwind of recent industry trends, shifting our outlook toward more moderate margins would conceivably also include better volumes, lower operating costs and improving demand for higher-margin premium fuels. •Value-creation from untapped B/S capacity: M&A and NCIB. Management recently noted modest acceleration in US deal flow, macro backdrop contributing to more constructive environment for talks and valuations. Our model makes productive use of estimated B/S capacity > $15B by incorporating NCIB of 10% of shares O/S through the end of F24.