With Alimentation Couche-Tard Inc. (TSE:ATD) It Looks Like You'll Get What You Pay For
When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 12x, you may consider Alimentation Couche-Tard Inc. (TSE:ATD) as a stock to potentially avoid with its 16.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.
For example, consider that Alimentation Couche-Tard's financial performance has been poor lately as it's earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Alimentation Couche-Tard
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Alimentation Couche-Tard will help you shine a light on its historical performance.
Is There Enough Growth For Alimentation Couche-Tard?
The only time you'd be truly comfortable seeing a P/E as high as Alimentation Couche-Tard's is when the company's growth is on track to outshine the market.
Retrospectively, the last year delivered a frustrating 2.2% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 55% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.6% shows it's noticeably more attractive on an annualised basis.
With this information, we can see why Alimentation Couche-Tard is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.
The Final Word
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Alimentation Couche-Tard revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Alimentation Couche-Tard that you should be aware of.
If you're unsure about the strength of Alimentation Couche-Tard's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
