It is easy to assume you've missed your chance at Alimentation Couche-Tard.
It has tripled from its summer 2008 lows; it's up more than a third from last fall, after it abandoned a bid for a large American competitor; and it's jumped a couple bucks since it announced on July 12 it would boost its dividend.
And yet there still seems to be chance for profit from buying the Laval, Que.-based convenience store operator. There's ample evidence Couche-Tard is establishing itself as one of the most delightful kind of companies, one that can post healthy double-digit growth in sales and earnings, while sending an ever-increasing amount of its cash pile directly to its shareholders.
At the same time, it's reasonably priced, prompting TD Securities Inc. analyst Michael Van Aelst to ask, "When will the market pay for such strong EPS growth?"
Perhaps some of the overhang comes from last year's failed run at Casey's General Stores Inc., one of the largest and strongest U.S. convenience store chains. With the benefit of hindsight, it seems like a missed opportunity: Couche-Tard offered $36 (U.S.) per share for the 1,500-store chain, now trading around $46 about 10 months later.
Couche-Tard's behaviour at the time raised questions about either its stomach or its competence: It sold a 3.9-per-cent stake in Casey's while its offer was still on the table, a curious move for a hostile bidder.
Now, the chain seems to be concentrating on lower-profile, but beneficial, deals to add to its network of roughly 5,800 locations: Couche-Tard struck a deal last month with Exxon Mobil Corp. to buy 322 California stores for an undisclosed price. At the same time, it announced three other, smaller deals for a total of 43 stores in the U.S. and Canada.
Continued acquisitions, plus strong performance in the U.S., where Couche-Tard gets three-quarters of its revenue, portend continued growth.
Mr. Van Aelst notes Couche-Tard has posted earnings-per-share growth of 20 to 30 per cent in each of the past two years, and has a 15-per-cent compound annual growth rate over the past five years, despite the recession.
"We believe that Couche-Tard has demonstrated consistency in delivering strong double-digit EPS growth. With this in mind, we remain surprised by the company's arguably modest valuation," at just under 13 times forward EPS prior to the July 12 earnings announcement.
Mr. Van Aelst notes Couche-Tard also posts return on equity numbers consistently greater than 20 per cent, free cash flow yields of 8 per cent to 10 per cent, and has "a clean balance sheet that can easily support additional accretive acquisitions."
He believes these factors, coupled with the EPS growth, will cause a multiple expansion to its historical averages of 14 to 15 times forward EPS, which, based on his fiscal year 2013 estimate, yields a target price of $38 (Canadian).
Other analysts are less bullish; Irene Nattel of RBC Dominion Securities Inc. has a target price of $31, just above Couche-Tard's current levels. Yet she points to the positive news that Couche-Tard said it would boost its quarterly dividend by 25 per cent to 25 cents a year, a yield of 0.8 per cent and a payout representing about 13 per cent of company earnings.
While the yield and payout are "at the low end" of dividend-paying stocks in RBC's coverage universe, Ms. Nattel notes, "dividend policy is a powerful price discriminator within the market and within sectors of the market, as stocks that do not pay or have recently cut their dividend underperform dividend payers and dividend growers."
Competitor Casey's, which has a 1.3-per-cent dividend yield, is "firing on all cylinders," says thestreet.com. It's both a "quality stock with low volatility" and a "bullish momentum stock being bought up by the smart money," according to financial blog Seeking Alpha. Zacks.com says to buy Iowa-based Casey's while it is still relatively unappreciated.
And yet Couche-Tard has "superior EPS growth, balance sheet and geographic diversification," says TD's Mr. Van Aelst, while having smaller multiples than Casey's. Ms. Nattel notes Couche-Tard is typically the industry's most efficient operator, with its selling expenses, as a percentage of sales, several notches below competitors.
As Couche-Tard's failed bid for a transformational deal disappears in the rear-view mirror, more investors will wake up to the stock's combination of growth and income. There's still time to be one of the early ones.
David Milstead