Heading into its Q2 2017 earnings release November 28, Alimentation Couche Tard Inc.’s (TSX:ATD.B) stock was performing abysmally in 2017, up just 6% on the year.
Couche Tard averaged an annual total return of 49% before 2016, when it went on its 15-month hibernation. Its shareholders aren’t used to measly single-digit returns. Something has got to kick it into gear; with its latest results combined with speculation of a big acquisition happening early in 2018, Couche Tard appears to be shaking off the cobwebs.
Earnings recap
I’m sure there will be additional Fool.ca coverage of its earnings, so I’ll stick to the key points from the latest quarter that I believe should matter to investors.
First, the company repurchased 4.4 million of its Class B subordinate voting shares that were held by Metro, Inc. two days after the end of the quarter for $250 million, or $57.17 per share — a 13% discount to where Couche Tard currently trades. That alone will save the company $1.5 million in annual dividends.
Second, Couche Tard is in the middle of rebranding its stores to the Circle K concept around the world. During the quarter, it completed the Baltic region and now has rebranded almost 2,000 stores in North America and 1,400 in Europe. The one-brand transformation will continue to pay dividends in the future regarding reduced costs for signage, marketing, etc.
Perhaps the most positive news of the quarter was its U.S. stores managed to eke out 0.7% same-store sales growth, despite losing 3,000 store days in merchandise sales and 5,700 store days in fuel sales. That’s a testament to the strength of the U.S. economy, because here in Canada, its same-store sales decreased 1.6% — the only blemish on an otherwise stellar quarter.
Post CST Brands
As it continues to integrate its biggest acquisition in corporate history, the focus is on reducing its net debt, which has more than doubled from US$3.4 billion at the end of Q1 2017 to US$7.6 billion in the latest quarter.
Currently, its net debt is 2.13 times adjusted EBITDA — almost double what it was in the first quarter. Knowing the company is dedicated to quickly repaying debt, investors should expect Couche Tard to commit most of its $1 billion in annual free cash flow after paying dividends to debt reduction and not additional share repurchases.
The one fly in the ointment to this seamless transition is if it makes another big acquisition, such as Kroger Co., whose 784 stores spread over 18 states is one of the last big convenience store chains — which account for just 40% of the U.S. convenience-store market — available for purchase. After Kroger, the consolidation game becomes more time consuming, so 7-Eleven Inc., Couche Tard’s biggest competitor in North America, will also be very interested in this asset.
What’s driving recent gains?
It’s a combination of things.
Earnings are good, the CST Brands integration is running smoothly, the potential Kroger acquisition would provide further growth in the U.S., and the general underperformance of its stock at a time when many TSX stocks are doing well has investors revisiting the Couche Tard growth story.
I wouldn’t call Couche Tard’s stock cheap at 14 times cash flow, but in recent years, that’s the multiple investors are willing to pay to own what I consider one of the five best stocks on the TSX.
I see Couche Tard stock coming out of its hibernation just in time for the holidays. Expect good things from it in 2018.
