Alimentation Couche-Tard (TSX:ATD) has been a difficult name to own, with shares giving up all of the gains enjoyed after the firm announced it’ll be walking away from its hopes to acquire 7 & i Holdings (the Japanese firm behind 7-Eleven stores). To make matters worse, analysts over at BMO Capital Markets downgraded the stock to “market perform” from “outperform.”
That’s pretty much the equivalent of a downgrade to hold or equal-weight from buy or overweight. And for investors, that’s another bout of bad news to digest as the Quebec-based convenience retailer struggles to come back after starting the year with tremendous weakness.
The lack of enthusiasm surrounding the retailer is almost palpable, especially after the underwhelming way its 7-Eleven deal talks ended.
Indeed, if you’re ready to throw in the towel on the name, you’re definitely not alone. BMO analyst Tam Chen sounded underwhelmed with the path forward, to say the least, with expectations for the slightest bit of margin expansion in the U.S. market.
Couche-Tard shares hit after a notable analyst downgrade
Aside from the notable downgrade, which couldn’t have happened at a worse time, in my opinion, Chen also slashed the price target by a loonie, now setting the price target at $75 per share, up just under five dollars (or around 7%) from current levels. That’s still a respectable gain from one of the most resilient consumer staple stocks in Canada, but it’s definitely lacking when you weigh how much earnings growth the firm has commanded in the past when it had been more active on the M&A front.
Personally, I think Chen’s latest downgrade isn’t anything to hit the panic button over.
Why? We’re talking about a downgrade of a dollar here. And while Couche-Tard has had its fair share of challenges so far this year, including the failed takeover attempt of 7 & i Holdings, I do think it’s a mistake to think that the firm will not find another way to grow via M&A.
At the end of the day, Couche-Tard is a growth-by-acquisition story that’s worked for so long. It just needs to find the right deals and ink them, and I think analysts will be back to upgrading the stock again as shares start to turn a corner and pick up some meaningful traction.
Shares look dirt-cheap despite a lack of needle-moving deals
Additionally, with shares going for 18.7 times trailing price-to-earnings (P/E), I’m unsure why Chen doesn’t view the valuation as “compelling.” Sure, Couche-Tard hasn’t done much on the acquisition front of late. But after a relative drought following the year-long chase of a blockbuster deal that was just not meant to be, I think there’s a setup in place whereby Couche-Tard can go on a major shopping spree again.
Though same-store sales growth could stay in a rough spot for some unknown duration, especially as the consumer finds itself on the ropes, I think it’s a bad idea to give up on ATD stock at a time like this. It’s a serious player that stands to gain as it consolidates the still-fragmented convenience store industry, one that is ripe for technological disruption.
Count out new CEO Alex Miller, if you will, but Couche-Tard stands out as a firm that will rise again. With shares down nearly 19% from their highs, I’d look to be a buyer rather than a seller.
