Power Growth Investor A Power Buy for 2023: Alimentation Couche-Tard keeps making good moves
When we made Alimentation Couche-Tard our Stock of the Year for Stock Pickers Digest (now Power Growth Investor) in 2012, it rose more than 60% that year.
Yet it wasn’t an isolated surge –- since we first recommended it in 2008, the shares are up a whopping 2,911.2%!
This solid, 40-year-old niche retailer operates some 12,300 stores in Europe and North America. It not only adapted to the pandemic—it thrived. It’s done a brilliant job of making acquisitions pay off in Canada, the U.S., and Europe too.
Its latest purchase adds another high-demand element to its business, one that lets the company cross-sell its services. This firm is well positioned to keep prospering in its markets. That means its share price has lots of room to move higher.
It’s also relatively cheap at 19.3 times forecast earnings.
ALIMENTATION COUCHE-TARD INC. (Symbol ATD on Toronto; www.couche-tard.com) operates 12,321 convenience stores across North America and Europe.
Couche-Tard has agreed to acquire retail assets in Europe from French energy giant TotalEnergies SE for 3.1 billion euros ($4.5 billion Cdn.).
Under the proposed deal, it will take over TotalEnergies’ retail networks in Germany and the Netherlands, comprising more than 1,500 service stations.
TotalEnergies and Couche-Tard would also form a joint venture to own and operate over 600 service stations in Belgium and Luxembourg. The joint venture would be 60% owned by Couche-Tard and 40% owned by TotalEnergies.
TotalEnergies believes that the partnership will maximize the stations’ non-fuel sales. The service stations in the four countries will remain under the TotalEnergies banner as long as the fuel is supplied by the company, for at least five years.
For Couche-Tard, the deal lets it grow further in Europe by expanding in some of that continent’s strongest economies.
Growth Stocks: Additional Revenue Streams Keep Expanding Alimentation Couche-Tard ’S Potential
Driven by acquisitions, including the June 2017 purchase of CST Brands for $4.4 billion, Couche-Tard’s revenue jumped 73.3% from $34.14 billion in fiscal 2016 (fiscal years end April 30) to $59.18 billion for fiscal 2019 (all figures except share price in U.S. dollars). For fiscal 2020, revenue then fell 8.5% to $54.13 billion. The decline was mainly due to lower fuel demand as the COVID-19 pandemic took hold. In fiscal 2021, revenue dropped a further 15.5%, to $45.76 billion as the pandemic continued to hurt fuel demand. Revenue then rebounded 37.3% in the fiscal year ended April 25, 2022, to $62.81 billion. In the fiscal year ended April 25, 2023, revenue rose a further 14.4%, to $71.86 billion.
As a result of the earlier revenue increases between 2016 and 2019, earnings climbed 60.2% from $1.19 billion, or $1.04 a share, to $1.90 billion, or $1.63. (All per-share figures adjusted for a 2-for-1 split in September 2019.) Earnings then rose 15.8% in fiscal 2020, to $2.20 billion, or $1.97 a share. That rise came despite the lower revenue; it reflects sharply higher profit margins on fuel due to falling crude oil prices. In fiscal 2021, earnings rose 22.6%, to $2.72 billion, or $2.45 a share. Earnings then increased just 2.2% in fiscal 2022 to $2.77 billion, or $2.60 a share. The company’s costs rose and its fuel profit margins were hurt by rising crude prices. In fiscal 2023, earnings climbed a further 13.8%, to $3.15 billion, or $3.12 a share.
In the second quarter of fiscal 2024—the three months ended October 15, 2023—Couche-Tard’s revenue fell by 2.7%, to $16.43 billion from $16.88 billion a year earlier (all figures except share price in U.S. dollars). The decline came mostly from lower overall fuel sales.
Excluding one-time items, earnings fell 5.5%, to $792.0 million from $838.0 million. Sales of higher-profit-margin convenience store offerings partly offset the lower fuel revenue. Per-share earnings were unchanged at $0.82, on fewer shares outstanding.
Couche-Tard continues to aggressively repurchase its shares. During the quarter ended October 15, 2023, it spent $672.9 million to buy back shares.
Meanwhile, investors are also benefiting from a 25.0% rise in their quarterly dividend, to $0.175 (Canadian) a share from $0.14. That increase started in December 2023. The shares now yield 0.9%.
The company continues to roll out its new loyalty program. That encourages customers to visit more often and spend more per visit.
The program, Inner Circle, gives members discounts on fuel and merchandise. It upgrades to a premium membership, which includes more exclusive deals as well as early notice of new products once the customer spends $500 at Circle K stores.
Couche-Tard’s initial launch in June 2023 included 429 sites in Florida—but it plans to roll out the program to about 2,500 Southeastern stores before the end of 2023. However, if the launch throughout the Southeast goes well, Couche-Tard is prepared to add another 2,000 stores this year, meaning its Inner Circle program could hit 4,500 U.S. locations by the end of 2023.
The company saw 1.2 million enrolments in the new membership program just three weeks after debuting the platform in Florida—and now has over 2.7 million members.
Meanwhile, to boost its prospects, Couche-Tard now plans to open electric vehicle (EV) fast chargers at more than 200 Couche-Tard stores in Canada and the U.S. Notably, it has already built—and gained expertise from—its network of 1,000 chargers covering more than 230 Circle K stores in Norway, Sweden and Denmark.
The company has also formed a partnership with Green Thumb Industries (symbol GTII on the Canadian Securities Exchange). Green Thumb will sell licensed medicinal marijuana at about 10 of Couche-Tard’s 600 Circle K gas stations in Florida beginning this year.
The firm also recently added to its chain of car washes with the acquisition of True Blue Car Wash LLC, which has 65 locations in high-traffic areas of Arizona, Illinois, Indiana and Texas. Couche-Tard completed the purchase in February 2023, and the purchase price was about $300 million.
True Blue’s car washes should be a good fit with Couche-Tard’s own network of more than 2,500 car-wash locations, and True Blue has a strong pipeline of future new sites planned and under development. The chain has seen strong growth in recent years and washed more than 10 million cars over the last 12 months.
Couche-Tard says that more than 85% of True Blue’s car wash locations are within three miles of one of its own Circle K locations. That means the acquisition provides a strong geographic overlap to support traffic between True Blue sites and Circle K convenience stores.
Growth by acquisition adds risk, especially with a string of deals as big as these. However, the company has a long track record of successfully integrating those businesses.
The company has announced a new five-year growth plan. It now aims to increase its annual earnings before interest, taxes, depreciation, and amortization (EBITDA) from $5.8 billion U.S. in fiscal 2023 (fiscal years end April 30) to $10 billion U.S. in fiscal 2028.
A big part of that growth will come from acquisitions, including its recent deal to buy most of the European retail assets of French energy giant Total Energies SE (see above).
Cost cutting will also help Couche-Tard reach its 2028 EBITDA target as its copes with rising employee wages and other costs.
For all of fiscal 2024, Couche-Tard will probably earn $2.98 U.S. a share, and the stock trades at a moderate 19.3 times that forecast. The $0.56 (Canadian) dividend yields 0.9%.
Recommendation in Power Growth Investor: Alimentation Couche-Tard is a buy.