Couche-Tard should weather COVID-19

Couche-Tard’s stores have mostly remained open during the COVID-19 pandemic and its results have been mixed. But it has the financial strength to see it through.

Deemed critical businesses, Alimentation Couche-Tard’s stores have remained open throughout most of the countries and regions in which it operates during the COVID-19 pandemic. But fuel volumes declined rapidly during the first few weeks of restrictive measures, though they stabilized in April and began to improve. And fuel margins benefited from the rapid and steep declines in crude pricing.

Merchandise sales, meanwhile, benefited from pantry stocking in the early days of the crisis. Starting in mid-March, however, sales declined due to reduced customer traffic, but were mostly stable in their decline week-over-week since then. Also, a higher average ‘basket’ helped offset some of the lost customer visits.

Alimentation Couche-Tard Inc. (TSX—ATD.B) is the leader in the Canadian convenience store industry. In the US, it’s the largest independent convenience store operator in terms of the number of company-operated stores. In Europe, it’s a leader in convenience store and road transportation fuel retail in the Scandinavian countries, in the Baltic countries, as well as in Ireland, and has an important presence in Poland.

Profits were growing before the pandemic

Before the pandemic hit, the company was enjoying high single-digit adjusted earnings growth. For the 40 weeks ended February 2, 2020, Couche-Tard made $1.7 billion (all figures in US dollars unless otherwise noted), or $1.51 a share, compared with $1.6 billion, or $1.38 a share, in the same period of 2019.

The increase partly reflected a 4.8-per-cent rise in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), to $3.3 billion. This was mainly due to higher road transportation fuel margins in the US and Europe, and to organic growth.

In mid-March, Couche-Tard declared a 12-per-cent increase to its dividend. We believe there’s a strong chance the company will be able to sustain the new dividend of $0.07 a share. That’s partly because the company regularly turns out healthy cash flows (see below). What’s more, it has a low dividend payout ratio (earnings/dividends) of just 19 per cent based on estimated earnings for fiscal 2020. Finally, it has strong liquidity, with $1.8 billion in cash and equivalents on its balance sheet and a further $2.5 billion available on its revolving credit facility.

Despite COVID-19, Couche-Tard is expected to report a 13-per-cent increase in its adjusted earnings per share (EPS) in its fiscal year 2020 which ended April 30. But the pandemic should have an impact on the company’s fiscal 2021 EPS, which is expected to fall to $1.51. Growth should resume in succeeding years.

Couche-Tard trades at a high but still reasonable 20.6 times its 2021 estimated earnings of C$2.02 a share. Its annual dividend of $0.38 a share yields 0.9 per cent. Buy for growth.

Why cash flow is important

It’s good to pay particular attention to a company’s cash flows before making a stock purchase. In fact, we think choosing a company on the basis of healthy cash flows is good, sound investment practice.

Cash flow measures a company’s ability to manage its operations. Without cash flow, managers would have to spend a lot of their time dealing with bankers instead of customers.

Take Alimentation Couche-Tard, for example. For the 40 weeks ended Feb. 2, 2020, the company earned US$2.4 billion in cash flow. After capital expenditures of $1.0 billion and dividend payments of $160.1 million, it was left with $1.2 billion in free cash flow. This gives it the flexibility to raise dividends, make acquisitions, pay down debt or buy back shares. And in these times when many companies are slashing their dividends due to COVID-19, free cash flow gives businesses the capacity to maintain their dividends, just as we think Couche-Tard will be able to do through the pandemic.

This is an edited version of an article that was originally published for subscribers in the June 19, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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