Pinning Down Alimentation Couche-Tard Inc.'s (TSE:ATD) P/E Is Difficult Right Now

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 19.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Alimentation Couche-Tard certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Alimentation Couche-Tard would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. EPS has also lifted 28% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 1.2% per annum over the next three years. With the market predicted to deliver 6.2% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Alimentation Couche-Tard's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Alimentation Couche-Tard's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Alimentation Couche-Tard's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Alimentation Couche-Tard you should know about.

If these risks are making you reconsider your opinion on Alimentation Couche-Tard, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.