Sometimes, the best opportunities are hiding in plain sight. While little-known small-caps tend to improve your odds of landing a long-term multi-bagger, one must not discount the growth potential behind some of the more compelling large-caps capable of transforming themselves to sustain high growth rates.
As you may know, the larger and more mature a firm becomes, the less growth it’s capable of. The larger a company grows, the harder it gets to keep up high double-digit revenue growth without compromising on profitability.
Diseconomies of scale are all too familiar for many behemoth-sized stalwarts as they run into competition and ever-crowding markets — and with that comes flat or even negative growth.
There are, however, anomalies like Apple, which are capable of evolving over prolonged periods. Despite being a ridiculously old company, Apple remains a dominant force that’s atop the S&P 500 Composite Index. Why has the firm been able to retain its strength through decades without falling into the stalwart rut that most other firms inevitably fall into with age?
A brilliant management team, innovation — and a moat
A TSX firm that’s also maintaining its edge despite its age, I believe, is Alimentation Couche-Tard (TSX:ATD.B), a large-cap company that most Canadians have heard of (or even own through a mutual fund or ETF), but have discounted because of the fact it’s a large-cap consumer staple within a “boring” low-tech industry that one wouldn’t think of when they’re on the hunt for the next big growth story.
Couche-Tard is a convenience store kingpin that boasts one of the smartest management teams out there, led by CEO Brian Hannasch. The company has grown by leaps and bound through M&A activities. But unlike most other firms, Couche-Tard is reluctant to pull the trigger on a deal unless there’s a high chance it’ll create value.
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The act of acquiring does not create value
In fact, it stands to destroy value if the acquirer overpays and underdelivers when it comes to synergies. When conducting acquisitions, acquirers are expected to pay a premium for a takeover relative to a market price. And if the acquirer isn’t the “best owner” of a firm or its assets, the synergies may not be enough to justify the premium price tag an acquirer will have to pay.
In the case of Couche-Tard, management does all the homework beforehand and isn’t afraid to walk away if the price for acquiring doesn’t come with a reasonable chance of unlocking substantial value for shareholders.
With managers that know the c-store business like few others, Couche-Tard can keep its growth and profitability high despite its growing size. The company has been looking at bigger fish (such as CST Brands) while improving upon same-store sales growth initiatives, and the results speak for themselves.
Couche-Tard launches lucrative pilot in Alberta with cannabis retailer Fire & Flower
Most recently, Couche-Tard launched a pilot project with cannabis retailer Fire & Flower to get a piece of the budding cannabis industry without having to wait for federal regulators to (slowly) give it the green light to sell weed at its locations.
Couche-Tard, which has the option of upping its stake in the cannabis retailer to 50.1%, recently had Fire & Flower open two retail locations next to its Couche-owned Circle K locations in Alberta. Fire & Flower will be separate from the Circle K convenience store, but will supposedly benefit from high traffic going into Couche-Tard convenience stores, as shoppers look to buy cannabis with their munchies.
If the Albertan pilot project sees success, I believe Couche-Tard will up its stake in Fire & Flower and potentially gobble it up entirely down the road. In due time, as regulators ease, we’ll likely see the barriers be knocked down between Couche-Tard and its adjacent Fire & Flower cannabis stores.
Until then, however, Couche-Tard is willing to dip its toe (and eventually its foot) into the lucrative cannabis retail space, which could be a massive boon for growth over the long haul.
Couche-Tard is ambitious, but also prudent to test the waters with Fire & Flower and its latest pilot in Alberta. Should the pilot show success, Couche-Tard will have unlocked yet another growth runway.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joey Frenette owns shares of ALIMENTATION COUCHE-TARD INC. The Motley Fool recommends ALIMENTATION COUCHE-TARD INC.