The TSX has not done very well compared to the American indexes, most notably in 2017. Natural resources (oil, metals) have not help the Canadian markets lately. Fortunately, there are some companies trading on the TSX that have done quite well. Alimentation Couche-Tard (OTCPK:ANCUF) is one of them. The convenience stores and gas stations operators has managed to produce decent financial results in the past few years.

Since I have invested in this stock in 2014, it has been one of the best performing companies of my portfolio. 2017 has been quiet. The stock has stayed between $60 and $65 for the past year. Some investors are wondering if the company can keep up with its financial performance of the past. I have conducted my own review to look at the growth possibilities going forward.

Valuation – PE and PEG vs. Peers

If we look at ANCUF’s current valuation and growth forecast, with end up with these numbers:

Let’s now compare these values with its peers:

If we analyze the average values of ANCUF’s peers, we can come to the conclusion that Alimentation Couche-Tard’s PE is according to its peers’ average. However, when we take into consideration the growth forecast from analysts for the next 5 years, than ANCUF is selling a discount with a PEG ratio of 1,38 against its peers’ average of 2,4.

DCF Valuation

ANCUF has done well in terms of increasing revenues and profits over the year. If we look at Revenues, the company has increased its revenues between 12-13% average over the past 10 years. Its profits also increased over 20% average per year.

As the company is growing, it will be difficult to match the profit growth rate of the last 10 years. In my model, I have used a growth rate of 13% per year for Revenues growth and a growth rate of 11% for the profits over the next 5 years.

According to these assumption, the share price target for the next year is 76,90$CA per share. At their current price of 64,23$CA, there is a 19,7% potential upside.

Return on Equity

ANCUF has provided an average of +/- 20% ROE per year over the last 10 years. The company has been quite efficient at matching this number over the year. Since it does not pay a very high dividend (payout ratio of 0,15%), ROE becomes a fundamental value to estimate where the stock may end up.

If we use 20% as an average ROE per year, and 15% as an average payout ratio, we could expect the EPS to be between 4,20 and 4,30 in 5 years. Given a PE of 25, the stock price could reach 106$CA within 5 years. At its current stock price of 64,23$CA, this represent annual return of 10,5%.

Discussion and Outlook

Now that we have looked at the numbers, let's discuss the company. Given its average of +/- 20% ROE over the last 10 years and its capacity to increase its sales by 12% over the last 10 years and its profits by an average of 20% over the last 10 years as well, it is clear to me that ANCUF's business plan is profitable and capable of providing growth on a consitent basis.

I have read that some observers believe the company is coming closer to its maturity. It is true that the company has grown a lot in the last 5 years, however with an expected growth rate of 19% in the next 5 years, the company still looks like a good bet for investors. The industry in itself, mostly in North America (see: U.S., Canada), is not expected to grow much in the next 5 to 10 years. This is why i like the fact that ANCUF's growth plan goes through acquisitions, and not only in North America, but also in Europe and in Asia.

Alimentation Couche-Tard has plenty of small competitors operating the same type of stores around the globe, however not many companies has grown its brand internationally. Here are some of the companies operating in Asia and North America, which are direct competitors to ANCUF:

1. Tesco PLC (OTCPK:TSCDY)
   • Revenue Growth Rate (2013-2017): -3%
   • Profit Growth Rate (2013-2017): -46%
   • PE: 40,1
   • PEG: 2
2. Family Mart (FYM.F)
   • Revenue Growth Rate (2012-2016): 6,7%
   • Profit Growth Rate (2012-2016): 3,6%
   • PE: 14,5
   • PEG: 1,4
   • Return on Equity (last 5 yrs): 8,8%

        3. 7-Eleven

• Info not readily available as the company is now private.

Given the numbers we have considered for ANCUF, and the numbers provided above for some of its most important competitor, i see, as an investor, more potential for growth through ANCUF than the other competitors trading on the Stock Markets. I especially like the ROE in the upper teens, and this is what investors get with ANCUF.

These players should be the ones with whom ANCUF will compete to consolidate the world market of convenience stores.

Opportunities

1. The company has done well acquiring convenience stores operators to grow its revenues and profits. Even though there are other potential targets in North American and in the USA, the company seems poised to look at the Asian markets to fuel its growth. Given the size of these markets, the opportunity is intriguing
2. The convenience stores and Gas station 'industry' is considered as fragmented. ANCUF, as a sector consolidator, could befenit from this.

Risks and Headwinds

1. Given the growth of the company in the past years, it's capacity to generate synergies to increase profitability, and given its strategy to grow through acquisitions, we should note that acquisitions in the future will have to be of much larger scale then its previous ones to keep up with the growth rate. The other option is to complete acquisitions at a higher rate. Both options will be a challenge to the management team, which is used to complete successful mergers into its existing operations.
2. Gas engines and vehicles are not going to disappear overnight, however the requirements to look at replacing future sales of fuel and gas will have to be met. The company is looking at provide refill station for electric cars in Europe. The company may have to invest into its stores to follow the changing markets.
3. The rise of the interest rate should have an impact on the cost of its financing activities to complete its acquisitions. The company will have to be disciplined to purchase competitors at a decent price.

Considerations

1. ANCUF has stores in Canada, the USA and Europe, so it is exposed to currency exchange fluctuation. The company reports its financial results in USD, however the per share values and stock price is in CAD
2. The company has done well by growing its revenues through acquisitions. The expectation is that the company’s management will continue growing its revenues stream through acquisitions.
3. Since ANCUF is operating conveniences stores and gas stations, it should be able to sustain rougher times during economic slowdowns ATD manage to increase its revenues during the economic slowdown of 2008-2009.

Conclusion

ATD has been good to its investors in the past 10 years. Even though investors should lower their expectations for years to come, the company has the tools to increase its value. Further more, the stock, at its current valuation, could be an nice entry point to new investors.

Disclosure: I am/we are long ATD-B.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Author's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.