3 Reasons to Buy Alimentation Couche-Tard Inc. Today

Over the last five years, it’s been a pretty sweet ride for Alimentation Couche-Tard Inc. (TSX: ATD.B) shareholders.

Excluding dividends, shares have increased more than 580%, soaring from approximately $7 each at the end of the Great Recession to closing at nearly $50 on Friday, on news that the company acquired some 1,500 convenience stores from The Pantry Inc.  (NASDAQ: PTRY), an operator located in the Southeastern United States. Couche-Tard will pay US$1.7 billion for the transaction, which adds approximately 25% to the company’s existing store count of approximately 6,300 stores.

While the stock has already done incredibly well, there’s still room for it to grow. The company’s balance sheet is still healthy, with a debt-to-equity ratio of approximately 0.5. Earnings are also growing nicely, rising to $0.50 per share during its latest quarter. Management follows a consistent pattern. It makes a major acquisition, uses earnings to pay down debt issued by it, and then repeats.

Besides management’s prudent acquisition record, here are three more reasons why you should buy Alimentation Couche-Tard stock today.

Lower gas prices

While the recent drop in the price of oil has caused those in the industry a few sleepless nights, it’s good news for a number of sectors. Airlines should get a bump, as well as companies that use a lot of fuel, like FedEx or UPS.

One surprising winner is convenience stores. Sure, the average gasoline transaction size will go down, but we all know that gas isn’t where the money is. Lower gas prices lead to people driving more, which leads to more trips to fill up the tank. More trips to the pump means more trips inside of convenience stores, where suddenly folks have a few extra dollars to spend on high margin impulse items like soda, chips, and chocolate bars.

Lower gas prices also lead to fewer customers driving off without paying, and puts less pressure on the operator to decrease gas prices right away. Customers are far less price sensitive at $0.80 per liter than they are at $1.50 per liter.

More consolidation opportunities

There are going to be opportunities for Couche-Tard to continue making acquisitions around the world, but particularly in North America.

Right now, there are a couple of locations where the company doesn’t have much of a presence. Its acquisition of Circle K in 2004 gave it a nice diversified footprint across the U.S., with the exception of eight midwest states, where it currently doesn’t have a single store.

Additionally, the company has only 300 stores in Western Canada. Considering the fact that it has nearly 1,600 stores east of the Manitoba border, it’s easy to see why pundits are calling on it to expand more aggressively into the west. There have long been rumors that Couche-Tard would be interested in acquiring Husky Energy Inc.’s (TSX: HSE) 500 plus convenience stores, which are primarily located west of Ontario.

And that’s not even mentioning anything in the rest of the world. The sky is pretty much the limit in the fragmented world of convenience stores.

Changing shopping patterns

There are a couple of upcoming trends that will likely be beneficial to the convenience store industry.

The first is an aging population. Older folks don’t want to walk through a huge grocery store to get staples like bread and milk. They’re happy to pay a little extra to buy those items at the convenience store just down the street and not have to suffer through unnecessary walking.

Additionally, there’s the matter of alcohol sales in Canada. In most provinces, booze is only able to be sold at government approved stores, much to the chagrin of most customers. There’s little doubt in my mind that eventually most provinces will liberalize the sale of alcohol and allow grocery stores and convenience stores to get in on the action. Having another high margin popular item will only help Couche-Tard’s bottom line going forward.

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Fool contributor Nelson Smith has no position in any stocks mentioned. David Gardner owns shares of FedEx.

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