Alimentation Couche-Tard (TSX:ATD) is a relatively little-known company outside of Canada, or at least it was. The Canada-based gas station and convenience store operator has built quite the global network and is a relatively large-cap player on the TSX, with a market capitalization of roughly $75 billion. But generally, this is a stock that doesn’t get a lot of coverage. So, when it does, investors in this stock pay attention.
At this year’s Sohn Conference, two analysts at NK Capital put forward Alimentation Couche-Tard as their top idea, an honour for any company and a shock to many who listen to these recommendations. This stock was dubbed “one of the greatest success stories in public markets priced like a value stock.” That’s high praise for Couche-Tard, and I think these analysts are right.
Let’s dive into what’s driving this increasingly bullish view on Couche-Tard from global investors and where the stock could be headed from here.
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Growth-by-acquisition model paying off
Couche-Tard’s business model is relatively simple. In a number of growth markets around the world, the company looks to consolidate family-owned gas stations or convenience stores, converting them to one of Couche-Tard’s banners in its core markets. Doing so generally leads to higher returns on equity, leading to outsized cash flow growth, which can be used to fund further acquisitions.
This model has been extremely successful in allowing Couche-Tard to continue to grow at a rapid pace using internally generated funds. Not having to tap equity or debt markets on a frequent basis is a big deal, given where the cost of capital is right now. And with a global presence, there’s geographical diversification that holds tremendous value for long-term investors looking at multinationals.
What do the numbers say?
In terms of Couche-Tard’s financial situation, the company continues to hit the ball out of the park. The company’s most recent quarter was impressive, with Couche-Tard bringing in $623 million of net earnings, good for $0.65 per share in diluted earnings per share. With a dividend distribution of $0.70 per share (less than 1% yield), this dividend is well-covered by roughly one quarter’s worth of earnings.
Over time, I would expect Couche-Tard to continue to raise its distribution in line with its growth profile. But for now, the company appears to be focused on reinvesting most of its capital into new locations. That’s a great thing for investors who believe in this model. I think this mix of reinvestment and capital redistribution to shareholders makes sense long term.
Bottom line
Couche-Tard is among the top Canadian stocks investors still aren’t paying enough attention to. I’m referring to Canadian and intentional investors alike. With more publicity should come greater valuation expansion, particularly if foreign investors look to Canada for growth. If that’s the case, this is a stock that could really go on a run from here. But time will tell.
