Alimentation Couche-Tard Inc. (TSX: ATD-B)

The Company

As you may or may not have guessed, I'm going through my portfolio alphabetically. The last of the companies that start with 'A' is Alimentation Couche-Tard. ATD (as I will call it from now on since it is a big name to type) basically does convenience stores and gas bars. Out here in Western Canada, we've heard of Mac's stores. In Quebec, they are called Couche-Tard. They also operate under the names Circle K among others. They have some of their own brands they sell in stores. Recently the stock took a jump on the purchase of a chain in Norway called Statoil Fuel and Retail ASA. The purchase of that was complete in June 2012and it caused the stock to reach 52 week highs which it is still staying very close too. Recently (on July 18th), they announced the purchase of 27 stores in Eastern Washington State.

Financials

Earnings

This is a company I was excited to buy this company back in 2010 when I first analyzed it. It had consistent earnings growth since 2001  with only one year of earnings contraction. This has continued into fiscal 2012 (which ended in April) with an impressive 21% increase in earnings per share. This is an excellent first sign that this is a growing company even though they have been around for over 10 years. 

Return on Equity

Return on equity continued my excitement. Before 2005 it was relatively lackluster at 9% in 2004 and 12% in 2003 and 2003. However, in 2005 that jumped to 22% and has continued in the range of 15-22% ever since.

Cash Flow

Cash flow continues the story. Positive 4 out of the last 6 years. Operating cash flow has grown every year but 2010. The company does have cash coming in .In 2012 there was a large increase in cash from operations (763.8 million vs 608.3 million in 2011) but a small decrease in overall cash mostly due to acquisitions.

Debt

The debt equity ratio MSN reports is 0.31 which I believe excludes non-interest bearing items. If you just calculate liabilities over equity, you get 0.98. These figures are from 2011 (which is what MSN has right now). From the annual statements for 2012, the debt/equity value is more like 1.04 with the quick ratio being 0.19 and the current being 0.85.

These numbers are not necessarily ideal (I'd prefer them to be able to pay off their current liabilities with cash and be more equity financed) but they are definitely not out of control. 

Shares Outstanding

Shares outstanding had been steadily decreasing since 2007. However they recently announced issuance of up to 7.3 million shares. They currently have 183.5 million shares down from 202.3 in 2007. This issue will apparently be used to pay down some long term debt (which appeals to me) and will only increase the number of shares by about 4%. Given their history of reducing the number of shares over the last few years, and the growth they are experiencing, I'm not concerned about this diluting the earning to the shareholder.

Another note on this, ATD is issuing stock when the stock is near a 52 week high. This seems smart to me. They are getting the best money they can get for this stock and using it to pay down debt.

Financials Conclusion

The financials for ATD look very solid to me. The earnings and ROE are predictable. The debt is under control and seems to be well managed. They have a history of reducing the amount of stock out there. The over all picture looks very good to me.

The Business

Competition

Probably the biggest competition to ATD would be 7-11. To a lesser extent companies like Shoppers Drug Mart in terms of convenience foods and such. I don't see a new player coming in and taking a lot of this business away though. They are an established company with recognizable brands.

Risks

I would see the biggest risk to the company in the short term being a misstep in their growth. For example, building stores in areas that won't make money, or buying another company that isn't doing well and failing to turn it around. 

Other than that, the convenience store business has been around as long as I can remember and this is a brand that has been out there. 

Expected Cash Flows

Dividends

Normally I do love me some dividends. Cash in my pocket is ALWAYS a good thing. However ATD is a growth play for me for the most part. Given that, the current yield on the stock is 0.6%. That is very small. They pay out roughly 10% of earnings and in 2009 they did decrease their dividend after a down year in 2008 (they made 0.92/share in 2008 as opposed to 0.94 in 2007). Once they recovered their earnings the next year though, the dividend increased past the 2007 level and has gone up since. 

This means, there will be a small steady income from this stock that should increase as earnings increase.

Capital Appreciation

This is where I would expect the investment to shine. Earning growth on average over the last 5 years was 21% and the last 10 years was 29%. Using the lower number is probably fine because they are acquiring new stores that will add to the bottom line so earnings can be expected to continue their growth. Actually, let's use a slightly smaller number, say 18%. Given that, the earnings expectation for the next 10 years should look like this:

Year	Earnings
0	2.49
1	2.94
2	3.47
3	4.09
4	4.83
5	5.70
6	6.72
7	7.93
8	9.36
9	11.04
10	13.03

Returns Analysis

Initial Rate of Return

The initial rate of return (trailing EPS/price = 2.49/47.40) is 5%. This is a bit low for my tastes but still better than a GIC or bond.

Total Dividends

Let's make the assumption that dividends will grow with earnings and use the 18% rate again. This is what that will look like:

Year	Dividend
0	0.3
1	0.35
2	0.42
3	0.49
4	0.58
5	0.69
6	0.81
7	0.96
8	1.13
9	1.33
10	1.57
Total	8.33

Total dividends for the 10 years would be about $8.33 which is an annualized return of about 2%. Not great but this is an investment for growth.

Future Price

I'm going to use a PE ratio of 12 for this one. Over the last 4 years, it has traded in the 10-12 range but it has historically gone quite a bit higher than that and is currently at 19. Given that the earnings in 10 years is projected to be $13.03 and the stock trades in a price/earnings range of 12, the price should be about 156.39. This equates to a return of 12%. Add the 2% return from dividends you get 14% return.

ROE Analysis

The ROE analysis is a little less exciting. The analysis is based a return on equity of 16%. This is possibly conservative because the 5 year average is 18% (the 10 year is 14%) but the last  4 years have all been 18 and 19% . Here's the table:

Year	Earnings	Dividend	Retained Earning
0	2.49	0.30	2.19
1	2.84	0.28	2.56
2	3.25	0.32	2.92
3	3.72	0.37	3.35
4	4.25	0.43	3.83
5	4.87	0.49	4.38
6	5.57	0.56	5.01
7	6.37	0.64	5.73
8	7.28	0.73	6.56
9	8.33	0.83	7.50
10	9.53	0.95	8.58

Under this analysis we get a total dividend of $5.60 and a price of 114.65 (9.53 * 12 P/E) for a total annualized return of 9.7%.

Returns Conclusion

This is often my dilemma. Do I buy into the EPS analysis that gives me a 14% return or the ROE analysis that gives me a 9.7% return. Both are pretty good returns but at 9.7% I'd probably pass an move on. I suspect the value will be somewhere in between. Say 12%. Still not bad at this price. I would make this a mild buy in my portfolio but definitely hold on to what I have as there is a lot of potential there for continued growth in earnings.

Current Holdings:

ATD is currently the golden child of my portfolio. I got in in December of 2010 and again in January of 2011 for a total of 88 shares at an average price of 26.13. Total investment was $2,299.78. The current value of this stock is $4,171.20 with a total dividend so far of $26.40. My total return is 83% on this stock. I'm very happy with that. 

Now do I want to buy more? I think I will wait for a drop and see. If no drop happens, I'll ride with my current investment and re-assess later. If it drops into the $40 range, I might come in again.