Alimentation Couche-Tard Inc. has come roaring back after a recent correction, beckoning investors to jump on the rebound. Momentum-loving investors probably should.
The convenience-store operator has been aggressively snapping up rivals in a bid to expand its international presence. It completed a US$4.4-billion acquisition of Texas-based CST Brands Inc. in June, 2017, adding more than 2,000 gas-and-convenience stores to a network that is being rebranded as Circle K stores beyond Quebec.
But disappointing financial performance and concerns about a looming slowdown at North American gas stations weighed on Couche-Tard’s share price earlier this year.
The shares tumbled more than 20 per cent between January and May, pushing them toward a three-year low and marking a rare weak stretch for this former go-to stock.
Now, though, Couche-Tard is on an impressive comeback: The shares have bounced nearly 27 per cent from their recent lows in May. And analysts are impressed with the company’s fiscal first-quarter results, arguing the return to form bodes well for the rest of the fiscal year.
On Friday, Keith Howlett, an analyst at Desjardins Securities, raised his target price on the stock to $74, from $70 previously. He added that the company’s rapidly declining debt and strong cash-flow generation makes the stock less risky than it was previously.
“Many others have attempted to grow by acquisition in the U.S. convenience store industry, but very few have succeeded over an extended period of time. It is easier to acquire convenience store assets than to successfully operate them,” Mr. Howlett said in a note.
By all accounts, Couche-Tard is operating them successfully – and its track record with CST Brands in particular, although little more than a year old, is feeding much of the optimism among analysts.
Couche-Tard reported that synergies from the CST acquisition, or the cost savings from identifying things such as duplicated services, have reached US$189-million just 13 months after the deal closed. Analysts believe this encouraging figure puts Couche-Tard on track to exceed its goal of $215-million in synergies.
“Furthermore, Couche-Tard has reversed the negative trends at CST, with these sites now outperforming the rest of the network in both fuel and merchandise,” Mark Petrie, an analyst at CIBC World Markets, said in a note. (He also raised his target price on the stock, to $75 from $73.)
But Couche-Tard’s successful integration of acquisitions – it now operates more than 16,000 stores in 14 countries after 12 deals since 2015 alone – is only one of the stock’s selling features.
Although some observers have been wondering if consumer traffic at gas stations will decline with the rising popularity of electric and hybrid vehicles, Couche-Tard is demonstrating that consumers are drawn to their convenience stores anyway: According to Desjardins, more than 60 per cent of transactions at Couche-Tard stores aren’t attached to fuel purchases.
This is helping to drive impressive gains in sales at stores open for at least one year. Same-store sales rose 4.2 per cent in the United States, with CST stores outperforming with sales growth of 5.4 per cent. In Europe, same-store sales rose 7.3 per cent; in Canada, they rose 6.6 per cent.
“U.S. organic sales growth is our focus, and we believe the key driver of investor sentiment, and on that front the company is dialed in and we are increasingly comfortable that momentum is improving,” Mr. Petrie said in his note.
There are a couple of potential headwinds to consider, though. First, analysts are overwhelmingly bullish on the stock, suggesting much of the enthusiasm for it is already baked in. According to Bloomberg, all 13 analysts who cover the stock have some version of a “buy” recommendation on it.
Second, the rally over the past four months has taken the stock above $66 in Toronto, which is within 3 per cent of a new record high. It’s hard to argue that the stock is beaten up.
Still, investors should delight in Couche-Tard’s ability to generate results. And with the shares trading at just 18.3-times trailing earnings per share, well below a five-year average price-to-earnings ratio of 20.8, valuation is compelling. The stock has been zig-zagging for three years, and looks ready to explore new highs.
David Berman