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david berman

Alimentation Couche-Tard Inc. has impressed investors with a long track record of big profits, big deals and a big share price – until now.

The convenience-store chain reported a dip in its quarterly profit on Tuesday and its revenue crept ahead by a mere 0.1 per cent, missing expectations and offering a rare challenge to a stock that has enjoyed a darling status among investors and analysts.

Over the past five years, the share price has surged 590 per cent, after factoring in dividends.

That's nearly 15-times the return of the S&P/TSX composite index over the same period, making Couche-Tard the index's third-best performer.

The fuel for these gains: Deals, deals and more deals.

Related (for subscribers): Couche-Tard says store rebranding has boosted Europe traffic

Read more: King of convenience: How Couche-Tard's Bouchard built an empire

Management recognized early on that convenience stores thrived on scale, giving them an incentive to expand through a blistering pace of global acquisitions.

Starting with one store located in Laval, Que., in 1980, Couche-Tard now operates more than 10,700 stores in Canada, the United States and Europe – largely through a series of takeovers that now define the company more than its sales of fuel, anti-freeze and snacks.

The company's appetite for deals is showing no sign of reaching a limit: In August, Couche-Tard signed a $3.8-billion (U.S.) agreement to acquire Texas-based CST Brands Inc., marking its biggest deal ever and adding more than 2,000 additional locations in the southwestern United States, Georgia and Eastern Canada.

Couche-Tard has justified the pace of acquisitions with consistently improving financial performance. From fiscal 2012 to fiscal 2016, the company's annual profit rose 160 per cent, to $2.09 (Canadian) a share. Over the same period, revenue rose 48 per cent, to more than $34-billion.

What's not to love about another deal?

Indeed, analysts are overwhelmingly bullish on the stock, with an average 12-month price target implying a gain of 24 per cent from the stock's current level of about $63.57.

But Couche-Tard's 2017 fiscal second-quarter results offer one reason to take a cautious approach. Profit fell 22 per cent to $324-million, while revenue was nearly flat. Even when you exclude some extraordinary items, profit still declined by more than 12 per cent.

Management attributed the decline to lower profit margins on fuel in the United States, a higher consolidated income tax rate and the impact from a couple of natural disasters, including Hurricane Matthew.

At the same time, the company emphasized that merchandise sold at stores open for at least one year rose modestly in Canada, the United States and Europe, bolstering the view that it knows a thing or two about integrating its acquisitions.

The market, though, isn't so sure. After the share price notched seven consecutive years of double-digit gains, it has moved up just 4.3 per cent in 2016, lagging the S&P/TSX composite index by 15 percentage points.

Meanwhile, the valuation on the stock – as measured by its trailing price-to-earnings ratio – is now 22.6, up from the mid-teens in 2012, suggesting that lofty expectations for profit growth are now conflicting with a stagnant share price.

For sure, skepticism about serial acquirers has also taken hold of many investors, given some recent setbacks. Valeant Pharmaceuticals International Inc. was bent on becoming one of the largest pharmaceutical firms in the world through an endless series of deals, until it fell on hard times and the share price plunged.

Before that, Garda World Security Co. was also expanding its security operations by snapping up rivals until it, too, floundered. Garda's founder took the firm private in 2012.

Alimentation Couche-Tard has been adept at growing through deals and impressing investors along the way. It still has to prove that it can do more.

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