The second half of 2022 has gotten off to a pretty stellar start, with the TSX Index adding around 4% in gains for the month of July alone. Undoubtedly, investors are bracing for tougher times, with a robust job market that could be threatened by Bank of Canada rate hikes.
Many skeptics don’t think the inflation beast can be slain, unless it means sacrificing this hot economy. A soft landing may be difficult to engineer for a Bank of Canada that needs to fight inflation now.
In any case, investors shouldn’t waste their time trying to predict what central banks are going to do next. Whether a 50-basis-point (bps), 75-bps, or another 100-bps interest rate hike is in the cards for the next meeting is less relevant to your portfolio over the long run. Does a 25-bps difference really matter at the end of the day? Probably not. Trying to forecast what surprise is up next is pointless for new investors.
Instead of trying to predict unpredictable events, as many are inclined to, it’s a better idea to focus on opportunities that exist today.
The stocks at discounts to their worth won’t always be out there. As such, it’s a good idea to buy stocks you deem as too cheap, regardless of how much the Fed or Bank of Canada hike rates over the coming month.
Alimentation Couche-Tard
Alimentation Couche-Tard (TSX:ATD) is a convenience store giant that’s up 10% year to date and over 86% over the past five years, crushing the market averages by a landslide. With a disciplined management team with a strong balance sheet and a willingness to conduct merger and acquisition (M&A) deals, Couche-Tard has benefited from the perfect combo of organic and inorganic growth.
Of late, Couche-Tard hasn’t really been in the news for blockbuster acquisitions. It’s long overdue, in my opinion, given debt from its CST Brands (the deal was worth US$4.4 billion) has now eroded. In a prior piece, I’d noted that Couche-Tard has the capacity to buy a firm worth north of $10 billion.
With Suncor Energy’s retail business (Petro Canada) up for grabs in the range of $10 billion or so, Couche-Tard may have the next blockbuster deal on its hands. Indeed, the deal lands in Couche’s strike zone.
Deal or no deal? Couche-Tard still positioned to clobber the TSX
Whether or not a deal happens, Couche-Tard is still well positioned to grow earnings at a high double-digit pace. Back in the summer of 2019, Couche-Tard had an ambitious goal of doubling net income in five years. Fast forward to today, and the company seems well on its way to surpassing its original goal if it can make good use of its swelling cash hoard.
The company must ensure sufficient synergies, though. Management has shown it’s in no rush to put its cash to work; I’d argue that a continuation of market volatility could allow Couche-Tard to score Petro Canada (or an alternative deal) under its terms at a price it deems a bargain.
If Couche-Tard can’t find a $10-15 billion behemoth to acquire, count on management to find more ways to invest in organic growth.
Private-label merchandise and fresh food are two categories that have acted as hot organic growth drivers in recent years. Couche-Tard has 3,200 locations aboard the “Fresh Food, Fast” program, with 2,900 in North America. Management believes fresh food is key to loyalty. If it can get its supply chain in order and expand upon fresh offerings, the best may be yet to come for the firm.
Personally, I think a grocery store deal makes more sense than a Petro Canada deal. Getting into the grocery game would take the “Fresh Food, Fast” program to the next level. In any case, Couche will be paying careful attention to the price it’ll pay.
So, don’t expect management to chase any particular deal. It’s management’s ability to not fall in love with a proposed takeover target that allows it to walk away and only make deals where there’s long-term value to be had.
