Description
ALIMENTATION COUCHE-TARD INC. (ATD CN) – Long
(all figures USD unless noted)
Last Sale: C$76/sh
Market Cap: $53B
TEV: $63B ($10B Net Debt)
30 Day Avg Daily Volume: 3.2mm shares/day (~$177mm)
Investment Horizon: 3-5 years
Summary
Alimentation Couche-Tard (ATD) is a leading operator of convenience stores and gas stations around the world. The business is highly stable and recession-resistant, and a solid generator of FCF throughout the business cycle. The company is run by a strong management team who have proven to be skilled capital allocators, and key to their strategy is to continue to roll-up the highly fragmented c-store industry across continents. Through both organic and inorganic initiatives, along with continued shrinkage in the share count, I believe ATD can grow FCF/sh at a mid-teens CAGR. Given that the stock trades at a very reasonable multiple of ~17x ’25 FCF, I think the shares can compound in value at the same rate as FCF over the next 3-5 years, if not longer.
Investment Thesis
The main points of the long ATD thesis are:
-
Defensive industry characteristics – over time, c-stores and gas stations have proven to be relatively recession-resistant. And, ATD's diversified geographic footprint across multiple countries also helps insulate it from local economic downturns. Mgmt expects c-store industry growth to continue to grow in the low single digit % range for the next several years across major geographies.
-
EV concerns are a manageable headwind. To put some numbers around this:
-
65% of c-store transactions are merchandise only, 25% fuel only, and 10% both.
-
Merch is ~50% of gross profit. And, industry inside sales have grown for 17 consecutive years (at a 4.3% avg clip).
-
Per the EIA, fuel volumes stopped growing 15-20 years ago, so the industry has already been operating in a flat to negative growth environment for some time. Going forward, this dynamic could deteriorate somewhat (depending on EV share gains), however, it seems like an average volume decline of much more than ~1% per annum is probably unlikely in the forecast period.
-
And, it should be noted that ATD is perhaps the best positioned of the c-store retailers to capitalize on the move to EV’s. ATD’s leading market share in Norway (the global leader in EV sales) provide a unique window into consumer behavior associated with top-up charging.
-
M&A opportunity – since 2004, ATD has done 73 deals, adding 11k stores globally. With its strong cash flows and balance sheet (pro forma ~2x net debt / ’24 EBITDA, BBB+ corp credit rating), ATD is well-positioned to continue consolidating the fragmented convenience store industry through strategic acquisitions globally. The company notes it has +$10B capacity for an all-cash acquisition, should a large, attractive opportunity arise. Overall, mgmt. targets 11%-15% ROCE for their deals.
-
In particular, ATD aims to continue to act as a consolidator in the US. The company currently is the second largest player in the industry holding ~5% market share, and mgmt notes that ~60% of the 150k stores in the US are owned by single-store operators. The #1 player in the US market is 7-Eleven (9% market share), and the #3 player is Casey’s (with 2% market share).
-
Well defined capital allocation plans. As described in the preceding bullet, ATD is keen on M&A and has a very disciplined approach. Beyond M&A, mgmt. has a well-articulated capital allocation plan as laid out in the following slide. In particular, I’d highlight the fact that mgmt. will consistently repurchase ATD shares (in the absence of attractive M&A opportunities), and over the last ~5 years the share count has shrunk by ~15%.
-
Management interests are aligned with shareholders, and altogether, insiders own 13.3% of the shares. ATD requires equity ownership by execs to ensure “that our executives have a stake in our future success and that their interests are aligned with those of our shareholders”. Requirements vary by level and executives must meet their ownership requirement within five years of assuming a position subject to such requirement.
Business Overview
ATD was founded in 1980 in Laval, Quebec by Alain Bouchard. He opened the first Couche-Tard convenience store with the goal of keeping stores open 24 hours per day, which was novel at the time. The company grew rapidly across Quebec and the rest of Canada through the 1980’s and 1990’s by acquiring and rebranding other convenience store chains. In 2001, ATD expanded into the US by acquiring the Silcorp chain based in Ohio. This kicked off an aggressive acquisition strategy that saw ATD purchase many regional convenience store operators across North America under brands like Circle K, Mac's, and Holiday.
As ATD continued its expansion across Canada and the US in the 2000’s and 2010’s, it also began expanding its global footprint through acquisitions in Europe and Asia. Major deals included purchasing Statoil Fuel & Retail in Scandinavia in 2012 and acquiring assets from Topaz in Ireland in 2018. Today, ATD is one of the largest convenience store operators globally, with over 16k locations across 26 countries. Its network of corporate and affiliated stores operates under various banners including Circle K, Couche-Tard, Holiday, Ingo, and others.
In addition to its substantial convenience store operations, a key part of ATD’s business model involves the sale of road transportation fuel through gas stations located at its convenience stores. The company has also been investing in new store formats and concepts to drive growth, such as adding quick service restaurants and increasing its food service offerings. With its size and global scale, ATD continues to pursue an aggressive acquisition strategy while also focusing on organic growth and innovation to maintain its position as an industry leader.
Valuation
-
ATD trades at a very reasonable valuation in my view.
-
Trades ~17x ’25 P/E which is inline w/ its avg mult over the last decade.
-
On EV/EBITDA the stock trades at ~11x, which is inline with its avg mult over the last decade
-
Mgmt has laid out a path to $10B EBITDA in ’28. Inclusive in this goal is >$1B contribution from future M&A. Should mgmt. be successful in hitting their goal I estimate ’28 FCF/sh would come in around ~$5.60 or (~C$7.70) – including dividend payments, and assuming the FCF multiple at which ATD trades today remains the same, this would equate to ~17% IRR for the shares during this period. Notably, this is about the IRR the shares have delivered over the last decade (+17.8%).
Key Risks
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
- M&A / capital allocation
- Earnings