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Alimentation Couche-Tard (TSX:ATD.B): Expect a Windfall in 2021

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Alimentation Couche-Tard (TSX:ATD.B)(TSX:ATD.A) has been losing market value even as the rest of the stock market surges. The convenience store giant has been overlooked by investors as they focus on tech and healthcare stocks. However, Couche-Tard stock could be on the verge of unlocking value for shareholders this year. 

If you’re an investor or have Couche-Tard stock on your watch list, here’s what you need to know. 

Growth strategy

Couche-Tard has grown from a single store in 1980 to over 15,000 stores spread across the world today. That growth has been driven by the management team’s savvy use of capital over time. 

The company’s cash flows have been aggressively deployed into acquisitions to expand the company’s footprint. Over the past 40 years, the company has acquired over 66 firms – an average rate of 1.65 every year. This strategy has been so successful that Couche-Tard stock is up 90,045% since 1999. 

However, this growth strategy has faced some bottlenecks in recent years. 

Speed bumps in deal making

Last year, Couche-Tard attempted the takeover of Australian gas station and convenience store chain Caltex. The deal was worth an estimated $7.1 billion at the time. However, the pandemic sent this deal off the rails.

This year, Couche-Tard management set their sights on a much bigger deal — a takeover of French grocery chain Carrefour. This deal was worth $25 billion — roughly 58% of the company’s market value.  However, this deal was blocked by the French government and has now been abandoned. 

The company now has $3.5 billion in cash on its books and the ability to borrow several times more to close a similar deal. A savvy mega-deal, of course, would unlock value for shareholders. But if the company continues to struggle in its quest for an acquisition, it may have to hand the cash back to shareholders. 

The dividend payout ratio is just 8% at the moment, so there’s plenty of room for a special dividend from the company. Either way, deal or no deal, shareholders should expect a windfall from Couche-Tard stock in 2021. 

Couche-Tard stock valuation

Despite its robust cash flow and balance sheet, investors have overlooked the stock. Couche-Tard is trading for just 15.5 times earnings per share. It’s also trading at an 8% discount to sales per share and roughly 10 times operating cash flow. 

The stock could also be spurred on by the economic recovery and resumption in travel in the second-half of this year. Higher sales and better foot traffic should be reflected in the company’s bottom line eventually.

By any measure, Couche-Tard stock is undervalued and underappreciated. That makes it a perfect fit for value-oriented contrarian investors. 

Bottom line

Alimentation Couche-Tard has delivered a fortune for investors over several decades. Its growth strategy hinges on acquisitions, but the team has struggled to complete recent mega-deals. With cash piling up, the company could consider a dividend hike. 

Couche-Tard stock is undervalued and the perfect target for both growth and income-seeking investors in 2021. 

Looking for more quality stocks? Here's a list.

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Fool contributor Vishesh Raisinghani owns shares of ALIMENTATION COUCHE-TARD INC. The Motley Fool owns shares of and recommends ALIMENTATION COUCHE-TARD INC.

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