Fill ’er up and a Danish to go; a growth stock with an appetite

Growth stock Alimentation Couche-Tard released stronger earnings for the nine months to February 1. It has also agreed to acquire 315 service stations in Denmark from A/S Dansk Shell. This will strengthen its position in Scandinavia. Couche-Tard remains a buy.

Alimentation Couche-Tard (TSX─ATD.B) has agreed to acquire the Danish retail business of A/S Dansk Shell. Couche-Tard earned more in the first nine months of fiscal 2015. We expect its earnings to keep growing as past acquisitions contribute for a full year in fiscal 2016 (which begins on May Day). This growth stock’s shares remain a buy for further long-term share price gains and small, but growing, dividends.

On Saint Patrick’s Day, Couche-Tard agreed to acquire the Danish retail business of A/S Dansk Shell.  This comprises 315 service stations, their commercial fuel business and their aviation fuel business.

Adding 315 service stations to the network

Of the 315 service stations, 225 are full-service stations, 75 are automated fuel stations and 15 are truck stops. Shell owns 140 of these 315 service stations, third parties lease 115 and dealers own the other 60. Couche-Tard writes, “We are already operating a strong network in Denmark and we believe this new acquisition would complement it very well . . . allowing us to realize strong synergies.”

We expect Couche-Tard to sell the aviation fuel business and remain focused as a consumer goods stock. In the third quarter of fiscal 2015, the company disposed of the aviation fuel business that it acquired from Statoil. This raised cash of $108 million (all figures in U.S. dollars unless preceded by a C).

But it could take a long time for this acquisition to pay off. Couche-Tard expects to close the transaction “before the end of fiscal year 2016”. That is, by April 30, 2016—more than a year from now. The company expects to finance the acquisition with cash-on-hand and borrowed money.

A growth stock with an acquisition appetite

More important for this multinational corporation’s earnings next year is its acquisition of The Pantry. As we reported in January, this U.S. company operates over 1,500 stores in 13 states. Include the debt and The Pantry’s enterprise value totals $1.7 billion. Couche-Tard expects the integration of The Pantry to “realize cost reductions of up to $85 million over the next 24 months in addition to growing in-store and fuel volumes.”

Couche-Tard earned more in nine months to February 1. In fiscal 2015, it’s expected to earn $2.29 a share. That would be up sharply from earnings of $1.42 a share last year. With the integration of The Pantry, we expect its earnings to rise in fiscal 2016.

Couche-Tard pays dividends of C18 cents a share. With the shares up so much, that yields just 0.4 per cent. On the positive side, this ‘dividend aristocrat’ has raised its dividend every year since fiscal 2010.

Couche-Tard controls debt

Acquisitions have always played a big role in fuelling Couche-Tard’s growth. It has had to take on debt to finance these transactions. Even so, the company keeps its debt under control.

Vice-president and chief financial officer Raymond Paré says, “Due to the rapid decrease of our indebtedness and to our solid performance, our leverage ratios keep declining significantly.” It plans to continue to repay debt this year.

The credit-rating agencies rate Couche-Tard’s debt ‘investment grade’. What’s more, its credit rating is better now than it was a year ago. The company wants to see its credit rating rise further and to remain financially flexible.

Alimentation Couche-Tard is a growth stock we view as a buy for further long-term share price gains and small, but growing, dividends.

 

The Investment Reporter, MPL Communications Inc.
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