Some people evaluate investment prospects based on the business model and how it helps to deliver profits. It’s also the window to the activities, especially the company’s cash-generating ability. Lastly, it will tell you if the business is resilient and adaptable to changes.
Several Canadian companies have strong fundamentals based on business models, but Alimentation Couche-Tard (TSX:ATD) stands out. It boasts a highly profitable business because of the significant market share in the convenience stores and gas stations industries. More smart money will likely pile into this industry leader in 2025.
Recession resilient
Couche-Tard is not immune to market volatility, but the business endures regardless of economic cycles. The $74.5 billion company operates more than 16,800 stores across Canada, the U.S., Europe (14 countries), and other international markets (16 countries and territories).
In October 2024, the convenience store giant made an offer to acquire its Japanese rival, 7-Eleven. Even if the persistent but friendly approach fails, Couche-Tard said it will never cease to grow. The vision is to become the world’s preferred destination for convenience and mobility, while the mission is to make customers’ lives a little easier every day.
According to management, the company is well-positioned to capture end-to-end value dynamically as market conditions change. Moreover, the fragmented U.S. market provides consolidation opportunities.
Couche-Tard is a dividend aristocrat owing to 14% consecutive years of dividend increases. At $78.56 per share, the yield is a modest but safe 0.9% (19.17% payout ratio).
Financial performance
In the first half of fiscal 2025 (six months ending October 13, 2024), total revenues increased 11.3% year over year to US$35.7 billion. Net earnings declined 9% to US$1.5 billion from a year ago. Its president and chief executive officer, Alex Miller, said the convenience store and fuel business were lower-than-expected in second-quarter (Q2) fiscal 2025 because of controlled spending by customers.
Nonetheless, Couche-Tard’s chief financial officer, Filipe Da Silva, notes the sequential monthly improvements in same-store merchandise revenues and positive momentum going into Q3 fiscal 2025. “As we continue to pursue growth opportunities, our strong balance sheet and disciplined capital deployment will support our proven long-term goal of creating value for our shareholders,” he said.
Effective M&A strategy
Couche-Tard’s extensive network today results from its expertise in closing and integrating mergers and acquisitions globally. Around 73% of the total network was from merger and acquisition (M&A) activities. The solid balance sheet enables the company to invest or pursue deals of any size that return 11% to 15% on capital deployed.
M&As are ongoing concerns, particularly in the U.S., where many competitors are single-store operators. In highly attractive expansion markets like Latin America and Southeast Asia, Couche-Tard intends to find partners with strong management teams and build a platform. A near-term plan is to penetrate key European markets to bolster its regional position.
Competitive advantages
Couche-Tard’s global scale and diversified business are competitive advantages and long-term growth drivers. Added tailwinds this year are healthy fuel margins, easing inflation, and the Bank of Canada’s rate-cutting cycle. Expect fantastic reverse synergies and more business growth with the GetGo Cafe Markets transaction in the U.S. closing in 2025.
