Alimentation Couche-Tard (TSX:ATD) stock enjoyed a 154.7% rally from March 2020 to February 2024, reaching above $86 per share. However, the $70 billion Canadian retail stock has largely consolidated this year, experiencing a 14.1% drawdown from its highs as it navigates a softer consumer market while pursuing a major Japanese acquisition. Could this be the right time to buy the dip on this proven steady-growth stock?
Known better by its convenience store brands Circle K and Couche-Tard, the Canadian retailer is a global giant in the convenience store and gas station industry, operating more than 16,800 outlets and growing through strategic acquisitions and efficient operations.
The current challenge for ATD today
Alimentation Couche-Tard’s acquisition-led growth strategy faces a significant test. In August, it launched an ambitious US$47 billion takeover bid for Seven & i Holdings, the Japanese conglomerate that owns 7-Eleven outlets and runs 85,000 global locations. Despite offering a 55% premium to the target’s pre-bid market value, Seven & i’s management has rebuffed the offer, believing they can successfully restructure and eliminate persistent valuation discounts internally.
The deal’s prospects appear dim, with Seven & i directors reportedly declining meetings with Couche-Tard executives. During his final earnings call in September, former CEO Brian Hannasch noted that the company had “walked away from many more deals than we’ve closed.” As relations currently stand, ATD might ultimately abandon the Seven & i pursuit.
The bull case: Why ATD stock might be a winner
ATD stock’s strong track record demonstrates the company’s ability to create shareholder value through accretive acquisitions. The company has historically been a strong performer, with consistent earnings growth and a rising stock price. A win in Japan, other new deals, and a return to normal consumer demand levels and patterns after recent inflationary periods may translate into potential gains for investors who hold onto their ATD shares.
Further, the business retains growth potential, as evidenced by recent 5.4% currency-adjusted revenue growth during the past quarter. Acquisitions fuelled ATD’s recent sales growth, and the company is always on the lookout for new opportunities. Synergistic benefits that come with the deals could lead to continued earnings growth and increased value for ATD stock.
ATD stock appears fairly valued with a price-to-earnings (PE) multiple of 19.2 which compares favourably against an industry average of 23.1.
The bear case: Risks to consider before buying ATD stock
Alimentation Couche-Tard operates in a highly competitive industry where maintaining healthy margins is challenging. If the Seven & i acquisition succeeds, the existing competitive pressures won’t disappear, yet ATD would take on significant debt to complete the deal.
Near-term challenges include weak consumer spending, which led to negative same-store sales growth in the most recent quarter. Despite management’s efforts to retain customers through loyalty programs and low-margin value offerings, adjusted diluted earnings per share declined by 3.5% year-over-year.
Long-term risks include the potential impact of electric vehicle (EV) adoption on fuel sales revenue, though this remains a distant concern given recent drops in global EV adoption rates.
Investor takeaway
ATD stock presents a compelling investment case with its proven track record and ambitious growth plans. However, investors should carefully weigh the risks, particularly the potential impact of the Seven & i acquisition on the company’s balance sheet, ongoing consumer spending patterns, and long-term industry shifts. The stock’s current valuation and strong operational history suggest it could reward patient investors willing to weather near-term volatility.
