Alimentation Couche-Tard Stock: Providing Convenience and Value

Alimentation Couche-Tard (TSE: ATD) operates a network of convenience stores and fuel stations across North America, Ireland, Scandinavia, Poland, and other countries across the world. The company has a measurable competitive advantage, as well as the backing from analysts.

Couche-Tard’s Competitive Advantage

There are a couple of ways to quantify a company’s competitive advantage using only its income statement. The first method involves calculating a company’s earnings power value (EPV).

Earnings power value is measured as adjusted EBIT after tax, divided by the weighted average cost of capital, and reproduction value (the cost to reproduce or replicate the business) can be measured using total asset value. If the earnings power value is higher than the reproduction value, then a company is considered to have a competitive advantage.

For Alimentation Couche-Tard calculation is as follows:

EPV = EPV adjusted earnings / WACC
$37.512 billion = $3.001 billion / 0.08

Since Alimentation Couche-Tard has a total asset value of $28.83 billion, we can say that it does have a competitive advantage. In other words, assuming no growth for Alimentation Couche-Tard, it would require $28.83 billion of assets to generate $37.51 billion in value over time.

Another way to determine if a company has a competitive advantage is by looking at its gross margin because it represents the premium that consumers are willing to pay over the cost of a product or service. An expanding gross margin indicates that a sustainable competitive advantage exists.

If a company has no edge, then new entrants would gradually take away market share, leading to decreasing gross margins as pricing wars ensue to remain competitive.

In Alimentation Couche-Tard’s case, its gross margin has been cyclical due to the nature of the business. Nevertheless, it has been in an overall upward trend in the past 10 years, rising from 12.9% in Fiscal 2012 to 18.4% in the past 12 months. As a result, its gross margins indicate that a competitive advantage is present in this regard as well.

How Alimentation Couche-Tard Creates Value for Shareholders

Great companies often have great management teams who can effectively allocate capital to profitable projects. We can get a good picture of management’s effectiveness by simply looking at the numbers. A metric I like to look at is the economic spread, which is defined as follows:

Economic Spread = Return on Invested Capital – Weighted Average Cost of Capital

The idea is straightforward; if the return on invested capital is greater than the cost of that same capital, then the company is creating value for its shareholders through well-thought-out projects. Otherwise, the company is destroying value and would be better off simply investing money into risk-free bonds.

For Alimentation Couche-Tard, the economic spread is as follows:

Economic Spread = 13.6% – 8%
Economic Spread = 5.6%

As a result, the company is creating value for its shareholders, implying that management is efficiently allocating capital.

Analyst Recommendations

Alimentation Couche-Tard has a Strong Buy consensus rating based on six Buys, one Hold, and zero Sells assigned in the past three months. The average Alimentation Couche-Tard price target of C$62.57 implies 8.4% upside potential.

Final Thoughts

ATD is a fundamentally-solid business with a strong track record of creating value for shareholders. In addition, it has a measurable competitive advantage, along with the backing of analysts. As a result, investors may want to consider keeping an eye on the stock.

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