Couche-Tard's Share Price Outpaces Earnings Growth, Raising Valuation Questions
Long-term investing success is typically measured by wealth creation, ideally through returns that outpace the broader market. For shareholders of Alimentation Couche-Tard Inc. (TSE:ATD), the global convenience store giant behind Circle K, the five-year journey has delivered gains—but not without recent turbulence and a notable divergence between share price and fundamental growth.
The stock has risen 74% over the past half-decade, trailing the overall market return. More concerning to some is the 7.6% decline over the last twelve months, a period that saw Canadian equities surge approximately 32%. This pullback prompts a fresh examination of whether the company's fundamentals justify its valuation.
A key metric reveals a potential red flag. During its five-year share price appreciation, Couche-Tard achieved a compound annual earnings per share (EPS) growth of just 2.5%. This pales in comparison to the 12% average annual climb in its share price during the same period. This widening gap suggests the market has been awarding the stock a higher valuation multiple, possibly in anticipation of future growth or strategic acquisitions, rather than rewarding current profit expansion.
"The market is forward-looking, but a disconnect this sustained warrants scrutiny," notes financial analyst Michael Thorne. "Couche-Tard's operational excellence and acquisition history have built a premium, but the recent earnings trajectory needs to accelerate to support it."
The total shareholder return (TSR), which includes reinvested dividends, paints a slightly better picture at 82% over five years. This underscores the role of the company's dividend in boosting investor returns. However, even including dividends, investors faced a 6.6% loss in the past year.
On a positive note, significant insider buying activity over the past year signals confidence from those who know the business best. Yet, for most market participants, the sluggish EPS growth remains a focal point.
Market Voices:
"This is classic market myopia," says David Chen, a portfolio manager at Laurentian Capital. "Couche-Tard has a proven, decades-long playbook for integrating acquisitions and driving margins. The short-term EPS figure misses the strategic value of its global footprint and balance sheet strength for future deals."
"A 2.5% EPS growth is pathetic for a stock that traded at a premium," counters Sarah Fitzpatrick, an independent investment blogger known for her blunt style. "Shareholders got hypnotized by the store count and bought the story, not the numbers. The last year's drop is the market waking up. This isn't a growth story anymore; it's a value trap until proven otherwise."
"The insider buying is the most compelling data point here," observes Arjun Mehta, a retail sector analyst. "It often signals a belief that the market has overcorrected. For patient investors, this period of underperformance might eventually be seen as a buying opportunity, but only if the core business can re-ignite organic profit growth."
While the long-term trend remains positive, delivering about 13% annualized TSR over five years, the current landscape presents a challenge. Investors are left to weigh the company's strong market position and proven acquisition strategy against the recent earnings slowdown and market underperformance. The coming quarters will be crucial in determining whether this is a temporary setback or a sign of a maturing growth narrative.
Market returns referenced reflect the market-weighted average returns of stocks trading on Canadian exchanges.
Disclaimer: This analysis is based on historical data and analyst forecasts using an unbiased methodology. It is not financial advice and does not constitute a recommendation to buy or sell any stock. It does not account individual objectives or financial situations. Simply Wall St has no position in any stocks mentioned.