Alimentation Couche Tard Inc. (TSX:ATD.B) reported a very disappointing earnings miss this week, and the stock responded by dropping nearly 5%. There’s no question that there were major headwinds thanks to oil’s sudden recovery, which hurt margins. Despite the poor results, I think the dip following the earnings report is nothing more than a buying opportunity for growth investors who have a long-term investment horizon.
The convenience store sector is still a very fragmented market, and this leaves ample room for Couche Tard to grow, so those patient enough to hold on to shares for the long haul will be rewarded with huge gains.
Don’t be tricked. Although Couche Tard’s stock has slowed down, it’s still growing at a rapid rate. The company just made a gigantic US$3.4 billion deal to buy CST Brands, which will provide a ton of synergy opportunities. The deal is expected to close soon, and it should be 12-13% accretive to earnings.
Sure, convenience stores are in a boring industry, and the defensive sector is out of favour with investors, but these are exactly the types of companies that Warren Buffett would want to buy. He favours simple businesses that have a proven ability to grow earnings over the long term, and he usually likes to buy these companies when they’re cheap and out of favour with the average investor.
Couche Tard has been growing its earnings by leaps and bounds over the last decade thanks to a terrific management team that drives synergies from its M&A activity. The management team is all about long-term value creation, so if a deal doesn’t offer opportunities for synergies or if it is too pricey, then they won’t proceed. That’s the way M&A is supposed to be done — not for the sake of short-term gains, but for the sake of long-term value creation. That’s why I think Couche Tard will be a huge winner over the next five years.
If you’re a patient investor, then buy shares and sleep peacefully at night knowing that the experienced management team is continually searching for long-term value in the convenience store space.
Brian Madden, the senior VP and portfolio manager at Goodreid Investment Counsel, believes there’s a very attractive entry point to get into Couche Tard right now after the post-earnings sell-off. I think he’s right on the money, as the company will inevitably skyrocket once all the potential value is unlocked from its latest acquisition of CST Brands.
