Alimentation Couche-Tard $ATD
So damn convenient it's hard to resist...
FULL DISCLOSURE: I currently own this stock in my personal portfolio so please do your own due diligence - this is not investment advice but more so for me to write out my investment thesis and perhaps get some feedback as to why I could be wrong… that being said, enjoy!
What do they do?
Couche-Tard owns and operates a series of convenience stores and gas stations. While many think they sell gas/snacks what they really sell is convenience and reliability. Couche-Tard has been in business since 1980 and has its roots in Quebec. Starting out slowly, the company has grown dramatically over the past 40 years to become a behemoth and well known owner in Canada, the USA and globally.
They bought up several chains starting in Quebec in the 80’s, then moved on to spread across Canada over the next 20 years including the Mac’s and Beckers chains in Ontario which are well known to this day. Their expansion moved south in 2001 when they acquired 172 Bigfoot stores in Indiana from Johnson Oil Company. In 2003, the company bought Circle K from ConnocoPhillips and this has been a reliable and well respected brand under the company’s management. They also use the Circle K brand internationally as a franchise model in Asia. In 2015 the company went further and established Circle K as the brand for its operations in the US, Scandinavian locations and english-speaking locations in Canada, while the Couche-tard brand remains in french-speaking Quebec.
Lately, the company has been looking for opportunities to acquire in order to continue its growth but has been somewhat unsuccessful in its large hunt as it lost to a competing bid to acquire 3900 Speedway stores to 7-11.
To the dismay of investors, management tried to acquire Carrefore SA in early 2021 for around 20 billion $ but the deal fell through after French government signaled it would not allow the acquisition.
Do they make money?
You bet your ass they do. Top line revenues per share have consistently grown (with a few exceptions in poor economic conditions) for many years through organic growth and acquisitions. They have very predictable revenues and cash flows have improved thanks to their significant scale. Gross margins 15% +/- 3% year in and year out while the cash flow margins have been improving. They consistently generate free cash flow from 0.03$ per share in 2007 to over 3.00$ in the trailing 12 month period. Even in downturns, the business is sticky and costs can be cut as required to continue strong through the period.
Are there reinvestment opportunities?
The convenience and gas store market is severely fragmented and I believe management will continue to focus on acquisitions going forward to fuel their growth trajectory for many years to come. They have had trouble with large acquisitions lately and may be gun-shy but time will tell. Throughout their history they have rewarded shareholders with increasing dividends from a penny in 2006 to 27 cents in 2020 (not bad). They have also been buying back shares recently and have historically not been net issuers of stock to the detriment of owners.
The ROIC numbers have been very steady at 10-15% over the last 10 years and show no signs of decreasing significantly. The ROE has been very predictable and normally just north of 20% thanks to some reasonable use of leverage.
Going forward now that the company is big, the question will be will management be able to sustain its significant growth from its history with acquisitions without hurting shareholders. Historically, they have been shrewd operates and have not chased deals for the sake of growth and have even been smart at cutting locations where the unit economics did not provide good returns as to focus on the best locations and better uses of cash.
Is there a risk of a blow up?
They have certainly deployed leverage with a enterprise value now at 58 billion dollars (CAN) and the market cap just shy of 49 billion. That being said, the leverage is not excessive and have over 11X interest coverage. Given the steady cash flows and good assets that the business enjoys I don’t see a huge risk here. Coming out of COVID their balance sheet should improve as people get back to their routines of travel for business and leisure. Given the routine and habit nature of convenience stores, there isn’t a big technology disruption that will knock out their revenues anytime soon. Some people are suggesting the death of gasoline powered automobiles but the reality is that will take a very long time and all the while, more and more cars will be on the road. The other thing to remember is that gas might be what gets people in the stores but the trusted name and clean reliable brand is what makes people return time after time.
Is management sketchy?
So far so good. Insiders own over 5% of the company still which is a great sign. Founder Alain Bouchard owns a significant number of shares and has done so for a very long time. They have been good operators and have grown without taking on too much risk over the years. They don’t chase deals as was evident at losing an acquisition recently to 7-11. Patience can be a virtue here and management appears to be aligned with shareholder interest. The ever increasing dividend is a sign that they are focused at returning capital over time to long term shareholders. I would like to see more share repurchases at low prices going forward as the size of the company might make it difficult to frequently do acquisitions that will move the needle.
Does it have a moat?
It certainly has a recognizable brand in the markets in which it operates. It has a relatively routine and sticky business model. I would say that it definitely has plenty of competition and that its edge is a good management team and a good history of solid acquisitions that fuel the growth of the business. I don’t think this is by any means a moat that is impregnable. That being said, its not the sexiest business for competition to attack either so this is perhaps less of a concern.
Either way: is it a great business? No. Is it a good to very good business - Yes, I would say so.
Is it cheap?
Yes. With a P/E under 20 (13 by some estimates) and a strong growth expected for at least a few years to come, it’s hard to imagine this being called expensive. Maybe it isn’t bargain bin priced, but its also not some cyclical commodity or melting ice-cube business either.
If you want fancier metrics, the EV/EBIT is 11 or so and the P/S is 0.88. If you try to factor growth by looking at the PEG (PE to Growth ratio) it is even better at 0.65. Bottom line, it is not expensive compared to its own history and certainly not compared to average good businesses in the market today.
If you want a reliable and steady grower at a reasonable price, this one should be one you look into further. It has history of an aligned management team that has rewarded its shareholders handsomely. While some of its pundits think its time in the sun is over thanks to a few acquisitions that did not go through, I suspect that is an overly pessimistic take.
The thing to watch will be competition for future acquisitions stalling growth or making deals not shareholder friendly as well as trends in gasoline purchases in the medium to long term pending what happens in the Electric Vehicle (EV) space. This seems like a lot of ifs and buts and coulda wouda-shouldas to me but what do I know.
What do you think? Let me know what you think and share/subscribe if you enjoyed.
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