Welcome to ‘Stock Teasers’, where we aim to provide investment research on a wide range of topics. In this edition, Cross-Border Stocks, we spotlight one Canadian stock and one US stock, regardless of sector or size. Let’s dive in!

Canadian Stock: Alimentation Couche-Tard (ATD) 

ATD is a global leader in the convenience store sector. It operates under different brands including Couche-Tard, Circle K, and Ingo. It provides food and non-food items, as well as fuels. It has a large network of convenience stores through company-operated stores and franchise stores. We consider it to be one of the highest-quality businesses that trades on the Canadian markets, and it has the ability to grow predictably over a multi-year period. 

In terms of its financials, it reported recent results which were weaker than expected, but fuel was the main factor, which is a volatile component of earnings. Inflation may put some pressure on consumers at the lower end, but the long-term prospects for ATD have not changed. It recently signed a deal with Too Good To Go to increase foot traffic. It pays a small yield of 0.9%, it has a history of margin expansion, and it trades at an attractive forward P/E of 18.5X.

We believe that ATD can continue to grow its free cash flow, acquire and integrate more convenience stores, and integrate them effectively while expanding its profit margins. We can see that its profit levels have largely grown over the years and its stock price performance has been excellent, proving itself to be a quality compounder. 

US Stock: Cadence Design Systems (CDNS)

CDNS provides software, hardware and intellectual property for semiconductor design and manufacturing. Essentially, CDNS can be thought of as an ‘architect’ of chips, which can benefit from the current high levels of AI spending. It supports the creation of integrated circuits, systems on a chip, and other devices by using GenAI for its customers to improve their own semiconductor designs. Its customers operate in various industries including automotive, aerospace, and healthcare, and its customers include the world’s most innovative companies.

Its growth has been around 13% on average, driven mostly by organic growth. It has a strong balance sheet, a net cash position of $500 million, and a track record of repurchasing shares. Currently, it has a buyback yield of 0.9%. It is not cheap at a 49X forward earnings multiple, but strong sales and earnings growth are expected in the next few years, with a healthy level of margin expansion expected.

Looking at its financials we see an incredible track record of beating earnings estimates, and long-term EBITDA expansion. Its valuation is rich, but it has contracted from 2021 levels, while its price has moved materially higher. We view CDNS as a high-quality name with exposure to the AI spending theme, and long-term secular tailwinds of bridging the gap between the digital and real world. 

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