Shares of Alimentation Couche-Tard (TSX:ATD) have been navigating through a painful correction in recent months. As the company looks to go big with its pursuit of 7-Eleven’s parent firm, investors are a tad worried about the mountain of debt such a blockbuster deal would entail.
Sure, Couche-Tard has raised a considerable amount of debt before with no problems. However, to say a 7-Eleven deal would be historic would be a vast understatement.
For now, shares of ATD seem riskier than ever as investors ponder what a deal could bring forth over the nearer term. While a successful closing of the deal is no guarantee, I still think ATD stock could prove seriously undervalued right here at $73 and change per share.
Though only time will tell if Couche-Tard enters bear market territory (I’d argue there’s a strong chance of this by year’s end), I view the name as attractively valued at 18.8 times trailing price to earnings (P/E) relative to its longer-term growth profile.
And Couche-Tard’s growth narrative, I believe, doesn’t depend on the fate of the 7-Eleven deal. Indeed, Couche-Tard may even create more value by going after smaller, tuck-in deals across various parts of the globe.
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7-Eleven deal uncertainty seems to be weighing on ATD stock
That said, 7-Eleven would grant Couche-Tard immediate exposure to some of the most lucrative parts of the globe (think the Asian region). Indeed, 7-Eleven’s Japanese stores are praised for the quality of food they sell. And while Japan-based locations may be a model for the future, the overall company itself hasn’t exactly been thriving, especially in the U.S. market.
Arguably, 7-Eleven shareholders should welcome Couche-Tard’s management team with open arms. After all, they’ve excelled at jolting earnings and bringing out the best in every acquired convenience retail firm it’s scooped up over the decades. For now, it seems like 7-Eleven’s managers are fine on their own, even with the “sweetened” pot. But will things change? That’s the big question for ATD shareholders at this pivotal moment.
Despite 7-Eleven’s mild resistance to a deal, I think a deal will happen. It could drag on for many months on end. However, I do think Couche-Tard will ultimately get the deal done at a price that’s not all too unreasonable (the current offer sits at US$47 billion).
Indeed, management has sounded pretty confident that the deal can be done. And the Canadian convenience retail king is not about to back down. Not while the price of admission to the convenience store icon is historically modest, even with the sweet premium that Couche-Tard could end up paying.
Either way, I think 7-Eleven deal uncertainty will persist into the first half of 2025. As such, investors should be prepared to take advantage of any further weakness.
The bottom line
In any case, I think ATD stock will be markedly higher five years from now. If a 7-Eleven deal happens, I think Couche-Tard will generate considerable synergies that could power enviable earnings growth. And if no deal is met?
I still think Couche-Tard will be in much better shape in five years’ time as it explores alternative merger and acquisition opportunities with its buying power. The industry is bound for consolidation, and Couche-Tard is the firm that will play a massive role in this. With that, I expect Couche-Tard to be a $100 billion company within the next five years, regardless of which path it ends up taking.
