Couche-Tard: Recession Resistant Stock Is Misunderstood By Investors


Investors should not fear potential takeovers once the dual class share structure ends in 2021.

Pershing Square challenge 2016 winning team pitches Alimentation Couche-Tard as best investment idea.

Convenience store industry is fragmented, massive growth potential is still present.

Debt is incredibly low considering the amount of acquisitions made over the years.

Stock has captured the attention of Pershing Square hedge fund manager Bill Ackman.

Alimentation Couche-Tard (OTCPK:ANCUF) has had a rough start to 2016, as the class B shares dropped nearly -12%. The stock is now in oversold territory, and through no weakness in the long term fundamentals of the business. Fears have been brewing over a potential hostile takeover of the business once the dual class share structure expires in 2012, as the company's founder Alain Bouchard worries that the Quebecois business may be one of the next businesses to leave its native soil. The founders own 22% of the company, however, the dual voting class shares will be phased out in 2012, and this leaves the company open to a foreign takeover. Investors should be buying the stock, not selling it on takeover rumors, however investors do not always make rational decisions. In this case, the current dip in Couche-tard's stock represents an incredible buying opportunity for investors who seek high growth for a discounted price, as the recent weakness in stock price has absolutely nothing to do with the fundamentals of the business, which are still very strong. Couche-tard also has captured the attention of billionaire hedge fund manager Bill Ackman, as Couche-tard was pitched as the best investment idea for 2016 in the Pershing Square Challenge.

Pershing Square challenge 2016 winning team pitches Alimentation Couche-Tard as best investment idea

Hedge fund manager Bill Ackman has an annual contest called the Pershing Square Challenge, which is a three month contest where MBA students at Columbia Business School present their best investment ideas to Ackman and a panel, which this year, included respected hedge fund manager John Paulson and CNBC expert Karen Finerman. The 2016 Pershing Square Challenge $100k prize winner were a group of three students who pitched Alimentation Couche-tard as their best investment idea. I will revisit the three key points that were mentioned in my previous pieces (Part One and Part Two), which were also topics which coincidentally, were brought up in the Pershing Square Challenge. The three quotes from the Pershing Square Challenge winners that I will be using to supplement my analysis are:

  1. "very resilient and provides very high free cash flow"
  2. "management has consistently purchased at below industry multiples"
  3. "Couche-tard only owns 3.5% of the U.S. convenience store market"

Point 1: Misunderstood Company is Recession Resistant

The first point was that Couche-tard was a very misunderstood business, in that the convenience store business provides is "very resilient and provides very high free cash flow" and that "fuel margins are not correlated to the price of oil, and that fuel margins will trend upwards". A big reason why the stock may be having huge dips lately, may be due to investor's confusion over how the price of oil impacts Couche-tard and it's fuel business. It is a common misconception that lower oil prices will imply much lower profits for Couche-tard, however, the opposite is true, as consumers are more likely to buy something from the store when they save money on fueling at the pump. The amount of free cash flow generated by Couche-tard is unbelievable, in 2015, over $1 billion in free cash flow was generated. This huge amount of free cash flow allows Couche-tard to make its acquisitions, where it pays way below industry multiples. This high amount of free cash flow that it generates allows Couche-tard to grow fast while still being able to keep its debt low, as in its last quarter, Couche-tard reported a 0.58 debt-to-equity ratio, which is unbelievably low when you look at the amount of acquisitions that the company has made over the past few years. By looking at the stock of Couche-tard, there is no way to tell that there was a recession in Canada because the stock soared despite the rout in oil prices.

Point 2: Huge value unlocked by M&A specialists

The second point was that "management has consistently purchased at below industry multiples", this was a main point in my first piece on Couche-tard. Management is actively seeking value in their industry and is paying way below market value for their acquisitions. To add to this, the company's ability to squeeze synergies out of these acquisitions adds even more value, as management has become incredibly efficient at cutting costs and driving same store sales through the roof. I said in my previous article that having Couche-tard management looking for acquisitions is akin to having a genius money manager actively seeking value in the market for you. Investors should just buy the stock and sleep comfortably knowing that incredible management is driving EPS through the roof, while keeping its debt low. Couche-tard is rumored to be interested in CST Brands, but you can count on management to pull the trigger only if there is value to be had, as they do not make deals for the sake of making deals. They are not afraid of walking away from a potential deal in the case of the potential acquisition of Casey's General Stores (NASDAQ:CASY).

Point 3: Growth is nowhere near done

The third point made in the presentation was that "Couche-tard only owns 3.5% of the U.S. convenience store market" and that there is an nearly unbounded amount of growth potential that is still present. This thesis was also stated in my previous piece, and is perhaps one of the most important, as well as overlooked facts about the market that Couche-tard is in. The company is an international company, and looks to grow beyond the U.S., so the market share owned by Couche-tard is even lower than 3.5%. Despite being the second largest convenience store operator behind 7-eleven, Couche-tard still has vast room to grow. Growth will not taper off any time in the near future, as the company continues to expand internationally at an incredible rate.

The Pershing Square Challenge winners then gave a two year price target of $84 Canadian, which currently a 58% upside from current levels. These price targets aren't even as bullish as TD Securities one year price target of $79, which presents a 47% upside from current levels. I believe the stock will recover from its 2016 underperformance, once investors realize there is nothing wrong with the company and that the business is indeed one of the best investment ideas of a lifetime. Bill Ackman and the panel of judges seem to think so.

Could Bill Ackman jump in?

I would not be surprised if Bill Ackman initiates a position in the company over the next few years, considering how he is a huge fan of M&A stocks, and that the company is now under his radar, thanks to the Pershing Square Challenge winners. I am just speculating at this point, but if Bill Ackman does initiate a position in Alimentation Couche-tard, he would have the ability to keep the company in Quebec and drive even more growth with his M&A expertise. Not that it is needed, considering it is already a very efficient company which has a high EPS growth rate, and an incredibly low debt level. Bill Ackman is a fan of Canadian stocks, as Canadian Pacific (NYSE:CP) and an infamous pharmaceutical stock have been his biggest holdings over the past few years. The business is incredibly misunderstood, as the firm has all the metrics of a forever business: a high ROE that is at an incredible 27% with an EBITDA growth rate (3Y) of 37.8% and an EPS growth rate of 34.8%. The stock has flown under the radar for far too long, but has started to capture the attention of big hedge fund billionaires in the U.S. The stock is a steal at current levels due to its positive growth outlook, which is still very much intact despite the recent drop in the stock. Personally, Couche-tard is the largest portion of my portfolio, considering it takes up 25% of my overall portfolio. I will continue to add to my stake as Couche-tard goes down, because I know that growth is still present, and management will continue to unlock value like it has in the past. If you buy the stock, own it for the long run, don't trade it, as you do not want to be on the sidelines once the stock is a household name by U.S. hedge fund managers like Bill Ackman, because by then the stock will trade at a huge premium instead of at a discount like it is trading right now.

Disclosure: I am/we are long ANCUF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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