Alimentation Couche-Tard Inc.'s (TSE:ATD) Business Is Yet to Catch Up With Its Share Price

With a price-to-earnings (or "P/E") ratio of 16x Alimentation Couche-Tard Inc. (TSE:ATD) may be sending very bearish signals at the moment, given that almost half of all companies in Canada have P/E ratios under 9x and even P/E's lower than 4x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's inferior to most other companies of late, Alimentation Couche-Tard has been relatively sluggish. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out the opportunities and risks within the CA Consumer Retailing industry.

Keen to find out how analysts think Alimentation Couche-Tard's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Alimentation Couche-Tard?

The only time you'd be truly comfortable seeing a P/E as steep as Alimentation Couche-Tard's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 8.1% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 61% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 3.6% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 4.3% per year, which is not materially different.

In light of this, it's curious that Alimentation Couche-Tard's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

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.

Our examination of Alimentation Couche-Tard's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Alimentation Couche-Tard with six simple checks.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.