Gas-station convenience stores are hot properties under the ownership of Alimentation Couche-Tard Inc. But how long can the company keep this winning streak going?
The stock has been hitting record highs this year, following a rally of more than 50 per cent since last May.
The gains are giving a glamorous sheen to a business model based on, well, convenience: Visits average just three to four minutes and most merchandise is consumed within an hour of purchase, raising questions about the importance of brand as Couche-Tard expands its empire of Circle K stores.
Yet there is no denying the success here, which is driving global recognition of the company based in Laval, Que.
“They’ve been ahead of the curve,” said Don Strenk, principal at SoCal Refining & Marketing, a consulting firm based in Irvine, Calif., that specializes in retail gas and convenience-store operations.
Mr. Strenk pointed to Couche-Tard’s real-estate savvy in snapping up properties and using the company’s heft to negotiate attractive supply agreements with gasoline producers.
“They have a rather good, wholesale margin,” he said. “It’s pretty bankable and there’s not a lot of risk in it.”
That’s especially true in the United States, where strong economic activity and low unemployment are putting more cars on the roads. According to the U.S. Federal Highway Administration (via the Federal Reserve Bank of St. Louis), the total vehicle miles travelled in the United States rose to a fresh record high in December: Over the previous 12-month period, Americans drove nearly 3,225-billion miles, up 7.9 per cent – or more than 236-billion miles – in five years.
At the same time, Couche-Tard is squeezing better margins on its fuel sales. In its fiscal third-quarter results, U.S. fuel margins expanded to 29.4 US cents a gallon, up from 15.7 US cents in the third quarter of fiscal 2018.
Add in good sales growth at outlets open for at least one year (up 4.5 per cent at U.S. stores in the third quarter, year over year) – driven to some extent by strong tobacco sales – and you can see why the humble convenience store is a hit with investors.
Although the stock has been a dazzling performer for decades, it emerged from a recent lull last May, when it stirred from the low-end of a three-year trading range. The shares have since rallied 54.7 per cent – offering a completely different ride to the S&P/TSX Composite Index, which is up just 2.4 per cent over the same period.
Couche-Tard is one of the best-performing stocks in the TSX over the past 11 months and has contributed the third-largest number of points to the benchmark index (behind Enbridge Inc. and Canadian National Railway Co.). The longer term looks even better: Couche-Tard’s share price has outperformed the TSX by 150 percentage points over the past five years, and the S&P 500 by more than 100 percentage points.
But where does the stock go from here?
Analysts, who are overwhelmingly bullish on Couche-Tard, caution that the company’s robust fuel margins are likely to sag in the current quarter because of rising crude-oil prices. Irene Nattel, an analyst at RBC Dominion Securities, estimates that fuel margins will shrink to about 15 US cents a gallon.
As well, many economists are expecting the U.S. economy will slow this year, which could affect activity on the roads. And, after a stellar run-up in Couche-Tard’s share price, it’s only natural to expect a cooling-off period.
But don’t give up on the company. Ms. Nattel raised her 12-month price target on the stock to $88 (from $85 previously) this week and maintained an “outperform” recommendation, as the company continues to wring efficiencies from previous acquisitions and uses the good times to pay down debt.
It helps that the company boosted its modest dividend by 25 per cent last quarter and has the approval to repurchase up to 17 million shares – implying that the company is becoming much more than an acquisition machine. Over the long term, that will pay off.
David Berman