Couche-Tard is a growth stock; buy for capital gains

Alimentation Couche-Tard is earning record profits again. We expect the company to earn record profits this year and next. It remains a buy for further long-term gains and small but rising dividends.

In the 26 weeks to October 12, Couche-Tard earned $589 million, or $1.04 a share (all figures in U.S. dollars). This was up by nearly 27 per cent from $468 million, or 82 cents a share, in the first half of fiscal 2014. These figures exclude one-time items in both periods. Sales growth outpaced cost growth.

In the first half, Couche-Tard’s revenues inched up by 1.2 per cent, to $18.134 billion. This reflected several factors. One was the construction of 24 new stores and the razing and rebuilding of two stores. It expects to build or rebuild 80 to 100 stores this year. A second factor was Couche-Tard’s acquisition of 83 stores in North America in the first half. By October 12, their North American networks comprised 6,303 convenience stores—of which 4,851 sell vehicle fuel.

Most factors raised first-half sales

A third factor was higher same-store sales. Merchandise same-store sales rose 2.8 per cent in the U.S., 1.6 per cent in Europe and 3.1 per cent in Canada. Same-store fuel volumes rose two per cent in the U.S. and Europe, but slipped 0.6 per cent in Canada.

One factor working against sales was the rising U.S. dollar. It reduced the value of sales and earnings generated in Canada and Europe.

In the first half, Couche-Tard’s costs rose less than sales. As a result, its total gross profit rose by six per cent. The company’s financial costs fell by over a fifth as it repaid debt.

It’s also profiting from cost savings and synergies from the acquisition of Statoil Fuel & Retail. This company operates 2,239 stores in Norway, Sweden, Denmark, Poland, Estonia, Latvia, Lithuania and Russia. But its exposure to Russia is limited.

Couche-Tard writes, “We have been actively working on identifying and implementing available synergies and cost reduction opportunities. Our analysis shows that such opportunities are numerous and promising.” In fact, since the acquisition, it has achieved pre-tax synergies of $119 million.
Couche-Tard set a “goal of annual synergies [of] $150 to $200 million before the end of December, 2015.” This will raise its profits.

In the first half, Couche-Tard’s cash flow rose by 6.6 per cent, to $714 million. This greatly exceeded net capital spending of $156 million, acquisitions of $156 million and dividend payments of $44 million.

In the first half, Couche-Tard used its excess cash flow to reduce its debt by $450 million. This and its higher cash flow have reduced its net debt-to-cash-flow ratio to 1.1. The better balance sheet led to a credit-rating upgrade by Standard & Poor’s. Vice-president and chief financial officer Raymond Paré says, “Our excellent financial health gives us the means to continue to expand our network as well as to be on the lookout for interesting acquisitions.”

In fact, we expect Couche-Tard to make small acquisitions in the second half. This will expand its network. But the company plans to improve its business. It writes, “For the remainder of fiscal 2015, we expect to pursue our investments with caution in order to, amongst other things, improve our network and build additional stores. We also intend to focus on our sales, supply terms and operating expenses.”

One plus is that Couche-Tard is willing to try new things to raise its profits. For instance, it says that its offer of Simply Great Coffee has succeeded in Europe. It plans to introduce more fresh products.
Couche-Tard raises its dividend each year. Still, at 18 cents a share, the dividend yields just 0.4 per cent.

Alimentation Couche-Tard (TSX—ATD.B; OTCMKTS—ANCUF) is a growth stock. It remains a buy for further long-term share price gains as well as small but rising dividends.

(N.B.  Since this story was written and published, Couche-Tard has announced the planned acquisition of south-east U.S. convenience store/service station operator The Pantry Inc. (NASDAQ—PTRY) for approximately US$860 million. Including debt, the deal is valued at US$1.7 billion. Both companies’ boards have approved the transaction but shareholder approval is required.)


The Investment Reporter, MPL Communications Inc.
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