Alimentation Couche-Tard Ltd Is Up 425%; Can its Growth Continue?

Investors who bought shares in Alimentation Couche-Tard Ltd (TSX: ATD.B) in 2009 are very happy campers today.

Shares have skyrocketed since just after the market reached its Great Recession lows, increasing more than 425%. This is mostly on the back of one huge acquisition, when it acquired more than 2,500 convenience stores from Norway’s state-owned oil giant Statoil ASA (ADR) for $2.6 billion. These stores were located across Europe, from Norway all the way to the Baltic countries.

Besides the huge Statoil acquisition, the company has been busy gobbling up smaller chains. Between 2012 and 2014, it bought more than 300 different stores across the United States in 13 different transactions. Management continues to see opportunities in the U.S. to further consolidate the fragmented convenience store industry.

Couche-Tard has been a terrific growth story for investors. However, it also trades at an all-time high, has a sizable debt load, and has a P/E ratio of more than 20 times earnings. Is it still worthy of a spot in your portfolio? I think it is. Here are three reasons why.

1. Challenging business

It may not look like it on the surface, but running a gas station can be a crummy business.

Most gas stations are run by independent owner-operators who are bound by a certain number of rules. They must use the company’s branded signage, gasoline, and suggested store setup. In exchange, they often get a great deal in rent — as low as $1 per month — and a great opportunity to run their own business with only a minimum amount of capital invested.

Despite this, it’s still a challenge to find franchisees. So why would this be good news?

Because it opens up the opportunity for more acquisitions. As more oil companies decide that they’d rather sell the gasoline to someone and not worry about running the convenience store, Couche-Tard can step up and acquire these properties. Since most companies in the sector aren’t really interested in growing, Couche-Tard is in a buyer’s market.

2. Possible deal with Husky Energy Inc. 

In the west, Husky Energy Inc (TSX: HSE) operates more than 500 convenience stores, ranging from small gas stations to bigger truck stops. It’s only a matter of time before it looks to get rid of these stores, and Couche-Tard is a natural buyer. The two companies are already working together, with Couche-Tard’s Mac’s Convenience Stores already selling Husky gasoline in certain locations.

Based on what Couche-Tard has paid for similar assets, Husky could likely get more than $500 million for its stores and just sign an agreement to supply them with gasoline for the next couple of decades. It’s a no-brainer of a deal, and Husky may look at it more seriously as the capital needed to expand its Asian drilling programs increases.

A deal with Husky would likely send Couche-Tard’s shares higher.

3. Strengthening balance sheet

One thing the company’s investors need to worry about is its balance sheet. So many acquisitions would leave any company stretched.

New CEO Alain Bouchard knows this is a concern, so management has spent the last year focusing on the balance sheet, setting the stage for the next big acquisition. The company paid down nearly $800 million in debt, and currently sits on more than $500 million in cash. Sure, the $2.5 billion in long-term debt is a concern, but none of it matures until at least 2017, with the vast majority of it coming due past 2020. The company also easily makes enough to cover the interest. At this point, the debt isn’t a big deal.

Alimentation Couche-Tard is a growth-by-acquisition story. There are opportunities for it to pick up stores throughout Canada, the U.S., and Europe. There’s still plenty of growth potential for the stock.

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Fool contributor Nelson Smith has no position in any stocks mentioned.

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