Alimentation Couche-Tard (TSX:ATD.B) can’t seem to catch a break these days. The company did a stellar job of managing through the COVID-19 pandemic and is in a spot to come roaring in a 2021 economic recovery. Yet, investors would rather gamble on speculative electric vehicle stocks, paying whatever price Mr. Market is asking for at any given instance.
2020 was a year where it paid to part with momentum while neglecting valuation. This year, I believe, the tables are probably going to turn.
Couche-Tard was a dirt-cheap stock that became unfathomably cheap following the latest plunge on news that the convenience store kingpin is in talks about a potential US$20 billion deal to scoop up French grocer Carrefour. With shares of ATD.B plunging over 10% on Wednesday, Canadian investors would be wise to go against the grain now that investors are scratching their heads over a deal that has perplexed almost everybody on the Street.
Here are three reasons why Couche-Tard is a strong buy after the Carrefour-induced dip:
Investors may be searching for any reason to sell the stock
First, consider how out-of-favour the consumer staples and defensives have been in recent months. Ever since the COVID-19 vaccine breakthroughs were revealed, people have been ditching their defensives for the hottest of reopening plays to maximize their upside in a return to normalcy.
Couche-Tard is a boring, old-fashioned defensive growth stock that you’d want to own if you think we’re headed for a prolonged recession. With most betting on a 2021 economic recovery, though, Couche shares have been under pressure for reasons outside of the firm’s control.
With a tonne of cash and credit, Couche had more than enough to scoop up an elephant in the c-store space. Couche decided to make a pivot into the grocery scene from out of nowhere — a move that left a lot of investors disappointed and confused. The grocery scene isn’t known for its wide margins, and Carrefour wasn’t exactly a grocer that was firing on all cylinders.
Undoubtedly, a Carrefour deal brings forth a lot of risks. At the same time, it could unlock a world of synergies that I believe is being discounted by most. As weird as a Couche-Carrefour deal would be, you should give management the benefit of the doubt given their track record of paying a dime to get a dollar and the profound synergies that have been generated through the years via M&A moves.
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The Carrefour deal isn’t as expensive as it seems
A US$20 billion price tag (nearly a 30% premium) is a high price to pay for a French grocer that’s had more than its fair share of troubles over the years. But compared to the magnitude of Carrefour stock’s multi-year decline, I’d say the premium isn’t as steep as it seems. Carrefour stock has been a vast underperformer over the years, as the firm felt the intense squeeze on its margins.
So, why would a convenience store operator known for solid margins want to get into the business of grocery stores that typically see paper-thin margins?
Couche’s Fresh Food, Fast offering has been a major boon for same-store sales (SSS) amid the pandemic. And with a grocery store thrown in, Couche would have easy, quick access to groceries for its European c-stores. In the same way Shopper’s Drug Mart has leveraged Loblaw‘s strengths as a grocer, I suspect a Couche-Carrefour deal would come with a world of synergies that most analysts haven’t had the opportunity even to ponder.
Also, I wouldn’t be surprised if Couche’s incredible managers were able to turn the ship around at Carrefour, as it continues to strengthen its global c-store presence.
The French government could block the Couche-Carrefour deal
A Couche-Carrefour deal won’t be to the liking of the French government.
In my opinion, there’s a high chance that the deal could be blocked. Although I’d like to see the deal go through, the French government has a right to be concerned, and if a deal were to get the red light, I suspect the recent Carrefour-induced weakness in Couche stock will be corrected to the upside by around 12%. In any case, I’m looking to buy more shares on the latest dip.
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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.