Couche-Tard: A growth story with more to tell

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Bulls, bears – they've all been wrong about Alimentation Couche-Tard Inc.

Having more than quintupled in share price over the past five years, the ascendant convenience store chain has blown past even the most optimistic targets.

Investors who missed out, and who might now be weighing an investment in Couche-Tard, would naturally be worried about buying at a peak. But the company has yet to approach the limits to its own growth.

"It's one of those companies where you should never be married to your price target, because the management team has proven so many times they can create value in ways you couldn't anticipate," said Greg Dean, an analyst and portfolio manager with Cambridge Global Asset Management.

The company has orchestrated its growth through the disciplined acquisition of competing chains. As oil companies got out of the retail business, Couche-Tard went on a buying spree, accumulating blocks of stores and shifting the focus from fuel to in-store sales.

"Most of the big oil companies see convenience stores as ways to sell more gasoline. Couche-Tard doesn't really care about fuel, but it drives traffic into their stores," Mr. Dean said.

The $1.1-billion (U.S.) acquisition of the 2,000-store Circle K chain from ConocoPhillips Co. in 2003 gave Couche-Tard a foot-hold in the United States. The company then moved into Europe in 2012 when it bought the Norway-based Statoil Fuel and Retail chain for $2.6-billion. Quite quickly, Couche-Tard had vaulted itself into the highest tier of Corporate Canada.

Now, just a year and a half after the European deal closed, another big acquisition opportunity has presented itself to Couche-Tard.

Last week, New York-based energy company Hess Corp. invited offers for its retail business, consisting of 1,258 convenience stores primarily located in the U.S. Northeast.

Industry analysts had already been speculating about Couche-Tard's interest in Hess for months. Despite Couche-Tard's ongoing effort to bring down its debt after the Statoil purchase, the company "could likely swing it," Irene Nattel, an analyst at RBC Dominion Securities, said in a note. "But just because [they] could do it, doesn't mean that they would/will do it."

Couche-Tard has established itself as an astute practitioner of the strategic acquisition, in large part because it refuses to overpay. The company bought Statoil for just 6.8 times earnings, and walked away from an offer to buy Casey's General Stores in 2010 when the price tag rose too high, said Ms. Nattel, who has a $78 target price on Couche-Tard stock.

Hess, on the other hand, is unlikely to sell cheap, as trading multiples in the convenience store space have risen recently. The valuation that would likely be required, at more than $2-billion, according to Ms. Nattel, "would be completely at odds with [Couche-Tard's] past behaviour."

So, investors should not count on another imminent blockbuster deal. Alternatively, the company would at least continue its campaign of smaller acquisitions. But investors have come to expect more than piecemeal growth from Couche-Tard.

"The question becomes, what will drive share price from here?" Perry Caicco, an analyst at CIBC World Markets, said in a November report that raised his 12-month price target to $83 from $63. "It could be argued that the current share price contemplates the next acquisition, and that anything less than a large, simple purchase could have little positive impact on the stock."

Couche-Tard has the means and ability to pull off the next big deal, if the price is right. But if it's not, the company can still generate baseline earnings growth of 10 to 15 per cent a year, Cambridge's Mr. Dean said. "They don't need to make acquisitions to achieve that." Not quite the kind of growth that will reproduce the 63-per-cent rise in share price the company pulled off in 2013, but not half bad.