One TSX Stock Just Got Seven Price Target Hikes After Earnings
Alimentation Couche-Tard posted fourth-quarter earnings on July 2, 2024, and by the end of the week, seven different analyst desks had revised their price targets upward. The convenience-store operator beat expectations on both revenue and adjusted earnings per share, but what caught Bay Street's attention was the North American same-store merchandise sales growth: up 4.1% in a quarter where most retail comps were flat or negative.
The stock closed at roughly C$73 before the report. The new targets ranged from C$80 to C$98.50, with the high end implying 35% upside. That's not typical for a company with Couche-Tard's market cap, about C$70 billion as of the earnings date, where double-digit moves usually require either a major acquisition or a sector-wide repricing. This was neither. It was operational execution in a mature category, which is harder to deliver and apparently harder for the market to anticipate.
Why the sudden consensus shift
The analysts weren't reacting to a guidance raise. Couche-Tard doesn't guide quarterly EPS. What they reacted to was margin improvement in the company's fuel business, which had been under pressure for most of 2023 as wholesale costs fluctuated and competitors discounted aggressively. The fourth quarter showed gross profit per litre stabilizing in both the U.S. and Canada, with the U.S. figure up slightly year-over-year for the first time in three quarters.
Fuel margins at convenience stores are a low-single-digit-percentage business on a good day. A 0.2-cent improvement per litre, multiplied across 9,000-plus company-operated sites in North America, is the difference between meeting the number and beating it by 6%. Couche-Tard beat by closer to 9%, which implies the merchandise side carried more weight than usual. Tobacco sales were down as expected, but packaged beverages and fresh food both grew faster than traffic, meaning higher basket size. That mix shift is what drives same-store merchandise growth above 4% when the industry average sits near 1.5%.
The other factor: capital discipline. Couche-Tard's management has a reputation for walking away from deals when the price doesn't work. They tried to buy Carrefour in 2021. Didn't happen. They've been named in rumors around several U.S. chains since then. Nothing closed. Meanwhile, the company has been buying back stock and paying down debt from the 2020 acquisition of Circle K Hong Kong. Net debt to EBITDA dropped to 1.1x in the latest quarter, the lowest in five years.
What the market might still be missing
Most of the analyst notes emphasized Couche-Tard's U.S. exposure and the stabilization story in fuel. Fair enough. But the company also operates in Scandinavia, Ireland, Poland, and the Baltics, where same-store sales growth in local currency ran above 6% in the quarter. That's a smaller revenue base, but it's growing faster and at better margins than the North American business. The European segment contributed roughly 15% of consolidated EBITDA in fiscal 2024. If that climbs to 20% over the next two years, and the current trajectory suggests it will, the valuation multiple should shift, because European convenience retail trades at a premium to North American gas-and-go.
The other underappreciated angle: Couche-Tard's private-label program. Roughly 18% of merchandise revenue now comes from owned brands, up from 14% three years ago. Private label carries a gross margin 8 to 12 percentage points higher than branded equivalents. The company hasn't broken out the exact figure, but if you assume a blended 10-point advantage and apply it to the growth rate in private-label penetration, that's worth about 40 basis points of annual merchandise margin expansion before any pricing or cost work. Forty basis points on a C$70 billion market cap is real money.
Seven price target hikes in one week is unusual but not unprecedented. What makes this case interesting is that the thesis didn't change. It sharpened.
