My new 2021 purchase: Alimentation Couche-Tard
On January 15th I purchased 50 shares of Alimentation Couche-Tard (TSE:ATD.B).
In today’s post I will explain how to price a stock, and why I think it’s a good time buy Couche-Tard.
A Defensive Strategy for 2021
Couche-Tard fits this narrative well and January is a good time to buy after it has been pummeled by the markets last year. This is a large convenience store chain that has a market cap of $42 billion. The company has 15,000 stores across Canada, the United States, Mexico, Europe, and Asia.
Fundamental analysis for ATD.B
When it comes to choosing stocks the number one thing I screen for is earnings growth over a long period of time. If a company isn’t growing its bottom line I’m not interested. Couche-Tard has averaged roughly 20% annual earnings per share (EPS) growth over the last 5 years and 10 years. That’s really consistent. 🙂
Secondary factors that are also important to consider include the revenue, and operating margin. Both metrics are very favorable for ATD.B. 🙂
- Revenue – Grown about 3x over the last decade. The company is increasing its market share. Awesome.
- Operating margin – About doubled over the last 10 years. That’s impressive as convenience stores usually have low margins as a sector. If the operating margin of a company falls over time that is a red flag.
Security analysis: How to determine a stock’s fair value
So we have established this is a strong, blue-chip company with high growth prospects. Now it’s time to determine the stock’s intrinsic value to find out if it’s cheap or expensive. The P/E ratio of ATD.B is 15x which is considered cheap given its historical growth rate. But let’s dig a little deeper.
I used the Graham Formula to determine the fair value of ATD.B
EPS = Trailing twelve months earnings per share.
8.5 = P/E base for a slow-growth company.
g = Expected long term earnings growth rate.
Couche-Tard’s EPS was $2.09 in 2020.
The analyst consensus for its growth rate is 22. But I will use 10 to be on the conservative side.
Intrinsic value V = $2.09 x (8.5 + (2 x 10))
V = $59.57
Based on the Graham Formula ATD.B should be worth roughly $60/share today. So buying it at $37.50/share gave me a pretty wide margin of safety. 😀
Other signs to consider:
- Dividends – The company increased dividends almost every year for over a decade. Average dividend growth is 23% a year since 2011. This technically makes it a dividend growth stock, which is the best type of stock in my opinion. A history of growing dividends is a sign the business has a sustained track record of increasing cash flow and profitability.
- PEG ratio – The price to earnings ratio divided by the forecasted growth rate is an indicator for value. The lower the PEG – the cheaper the stock. Right now the PEG is at one of the lowest point in the stock’s history. I expect this ratio to recover and with it, the stock price should rise assuming other factors remain constant.
- Analysts’ ratings and price targets – Stock analysts aren’t always right. But their predictions can be used as a sanity check to make sure your own conclusions about a stock is based on sound fundamentals. The consensus from experts indicate that ATD.B will be worth 43% more a year from now. That’s a pretty good endorsement. 🙂
Even when the overall stock market in the US is at all time highs, it’s still possible to find value. Alimentation Couche-Tard trades over the counter as (ANCUF) in the United States. As usual this is a long term hold for me. I will just let it grow in my tax free savings account.
There are multiple ways to evaluate a stock. Do you agree with my buy decision? Or do you think ATD.B is currently overvalued? 🙂
Won’t stop, GameStop
I plan to hold most of my investments to retirement. But sometimes I like to speculate using some play money. Last week as a YOLO trade I bought $GME and $AMC. I believe in this internet movement. I want see the hedge funds face the consequences of their risky actions. To the moon! 🚀🚀🚀
Random Useless Fact:
Entry-level camera operators can expect to make $18 per hour.