If you’re like Warren Buffett and like simple, easy-to-understand businesses with predictable and fast-growing earnings, then you’ll love firms that rely on the growth-by-acquisition model.
Now, not all firms can unlock above-average growth just by acquiring anything they can get their hands on. In the case of Valeant Pharmaceuticals, we’ve seen that M&A can go horribly wrong if debt spirals out of control — and if the price paid for such acquisitions isn’t well considered.
When you’re looking for a firm that’s leveraging the growth-by-acquisition model, pay special attention to the state of the industry. Is the company operating within a fragmented industry? How high is the growth ceiling? Are there meaningful competitors? What about technological disruption?
Moreover, it pays dividends to evaluate the capabilities of management. Are they exceptional stewards with a track record for spotting value? How capable are they of mitigating integration risks? Do they care more about unlocking value in the form of synergies for long-term shareholders? Or do they just want to drive up the short-term stock price by making deals just for the sake of making deals?
Yes, that’s a lot of homework, but for long-term investors, the rewards can be astronomical. Just look at Alimentation Couche-Tard (TSX:ATD.B), a top-tier growth-by-acquisition firm that’s crushed the TSX and S&P 500 Index over prolonged periods.
Couche-Tard has an outstanding management team that treats its company as a family business. Over the years, the company has made moves to consolidate the highly fragmented global convenience store market — reaping massive synergies in the process.
More recently, the company has put in the extra effort to bolster same-store sales growth by better catering to the tastes of locals. For Q3 fiscal 2019, Couche-Tard experienced solid 4.9% and 4.5% in Canadian and U.S. same-store sales growth, respectively, thanks in part to the continued fresh food expansion and ad campaigns.
Now that the company’s debt has been depressed to levels that would warrant another big deal, Couche-Tard is gearing up for another leg of growth as it continues to makes moves to optimize both organic and inorganic growth, sending free cash flows souring into the stratosphere. Seeing as the global convenience store industry is still highly fragmented, I think Couche-Tard’s M&A model will keep working for many years, if not decades to come.
Stay hungry. Stay Foolish.