- The Stock is undervalued by at least 30-50%.
- A 2021 Change in Shareholder ownership could unlock significant shareholder value.
- I have significantly increased holdings after the January price drop.
Anyone contemplating an investment in Alimentation Couche-Tard (OTCPK:ANCUF) should read the great business book "Daring to Succeed" by Guy Gendron, 2016 Juniper Publishing. It lays out the entire story of how Alain Bouchard built a multibillion dollar business starting with nothing. Bouchard had very humble beginnings at one point living in a mobile home in Quebec after his father's construction business went bankrupt. He started in the convenience store business as a stock boy in his brother's Perrette milk store. Bouchard went on to found his own convenience store company Couche Tard in 1980. Over the next 34 years he led that company as it grew from one store to over 12,500 stores around the world. One of the great lessons from the book is that Bouchard is a very aggressive risk taker. He fired one bank adviser when it told him he should be more conservative. At another point his banker told him he was technically bankrupt.
Bouchard relinquished the CEO role in 2014 to Brian Hannasch but remains as Chairman of the Board. Hannasch has done a remarkable job in overseeing multiple acquisitions, including the large ($4.4B) acquisition of CST brands that greatly expanded the North American business. In my view Hannasch has been a steady hand perhaps somewhat moderating the aggressiveness of Bouchard at times.
In 2020 Couche Tard had 73% of revenues from North American operations, 16% from Europe and 12% from Canada with a similar profit split. The company has some Asian operations but they are small at present. These were expanded with the recent $360 MM deal to purchase Convenience Retail Asia Ltd.'s Hong Kong unit. Merchandise and Service make up 27% of revenues and 52% of profits with Road transportation/fuel making up most of the rest. Among Merchandise and Service, tobacco products make up an important 41.3%, beverages 14.8%, beer and wine 12.2%, Food Service 11.7% with 20% coming from other products. Couche Tard has placed an increasing emphasis on Food Service in recent years. Stores are operated under the Circle K, Couche Tard (Canada), Mac and ingo brands among others. The company now has over 14,000 stores worldwide.
Prior to the pandemic the company had increased revenues by 83% over the prior 5 year period (2014-9). Earnings per share increased by 198% over that 5 year period. The pandemic posed challenges in 2020 as driving dropped sharply along with fuel prices. However Couche Tard managed through this admirably with eps expected to grow about 25% from 2019 levels. Same store sales for merchandise have been strong in recent quarters. While fuel sales were down, fuel margins have been rising due to excellence in sourcing and logistics.
Couche Tard is committed to long term growth that increases shareholder value. The company has a stated goal of doubling revenues every five years. In the past acquisitions have been a major source of new revenues. The convenience store business remains highly fragmented. This has presented opportunities. However with asset values climbing in the low interest rate environment of recent years it has become increasingly difficult to find properties at the right price.
Source: Couche Tard Investor Presentation
In 2020 Couche Tard walked away from a chance to acquire Speedway due to valuation and 7- Eleven got the deal for $21B. Couche Tard also pursued CalTex Australia but those discussions ended in early 2020 as the pandemic hit. In January 2021, Couche Tard made an unsolicited $20B offer for the French company Carrefour. This deal would have taken the company into the grocery store market and would have expanded its geographic reach (Europe and Brazil). The deal was shot down by the French government. The response of shareholders to the proposed deal was not positive and sent Couche Tard stock down around 17%. Comments by analysts pointed out the lower margins in grocery vs. convenience store. The French grocery market has also become increasingly competitive in recent years with the alliance between Amazon and Monoprix and the increasing role of discounters.
In a call with top shareholders following termination of deal discussions, Bouchard and CEO Brian Hannasch gave a reassuring commitment to deals that increased shareholder value. They indicated the possibility of entering adjacent business areas including restaurants and dollar stores as well as another unidentified business area. Despite the call, shares of Couche Tard have only regained a small portion of the value lost when the Carrefour deal was proposed.
Risk and Issues
The rise of electric vehicles is clearly a challenge for the fuel business. While the forecasts for EV growth are quite varied, a number of forecasts project that 20-30% of new car sales will be EV in 2030. This might translate in a total percentage of EV cars of around 10-15% using models with average car age of around the current 11 years. So while EVs are a long term threat they will not destroy the Couche Tard fuel business any time soon.
Couche Tard is already responding to this challenge in Norway where EV penetration is already high. The company has installed chargers at its stores and is selling chargers for home use. The company has closely studied consumer behavior during charging and as a result has expanded food service at some locations. Couche Tard plans to use this model for the US and Canada as it rolls out charging stations in those markets. Other convenience store chains such as Casey's are also adding chargers. Overall the rise of EVs will probably hurt somewhat but the company's plans should reduce lost sales to a manageable level.
Work from Home Economy
The pandemic has caused many people to work from home which has decreased commuting. It is likely that this trend will continue to a fair extent even when the pandemic subsides. This is likely to reduce fuel sales.
The 2019 Couche Tard Annual Report included language in the Risks section disclosing that the company could be sued for health problems related to the tobacco products sold. The company pointed out that it sells national brand products as well as products manufactured by Couche Tard on an exclusive basis. In the 2020 Annual Report this language was deleted. I note that Casey's General Stores has no listing of such a risk in their most recent 10-K filing, even though they have a significant tobacco product business. Many convenience stores including Couche Tard have experienced sporadic issues dealing with sale of tobacco to minors.
In 2019 Couche Tard entered into an agreement with Canopy Growth . This agreement creates a strategic partnership in the creation of Tweed brand stores in Canada and the US.
In 2019 Couche Tard entered into an agreement with cannabis seller Fire And Flower. Under the terms of the agreement Couche Tard paid $26 MM(CA) for a 9.1% interest. The agreement includes warrants that would allow Couche Tard to increase its ownership to 51.6%. Currently Fire and Flower operates 74 retail outlets currently throughout Canada. Fire and Flower acquired the cannabis retailer Friendly Stranger to further expand. Couche Tard and Fire and Flower are working together to explore the best way to maximize the partnership. One possibility under consideration is to have Fire and Flower stores adjacent to Couche Tard stores. Fire and Flower is also looking at the Couche Tard partnership as a vehicle to expand into other countries beyond Canada. This would include the US.
The recreational cannabis market for Canada is forecast to be around $5.5 B (Canadian) for 2021. Forecast for the US market for 2025 range from $30-40B. So participation in these markets could add significant revenues for Couche Tard.
Contactless Payment Stores
The company has opened stores at McGill in Canada and in Arizona that offer contactless payment. The concept is similar to the Amazon Go stores. Magnus Tagtstrom, head of digital innovation at Alimentation Couche-Tard, says that autonomous and contactless payment is one of the company's priorities when it comes to innovation to facilitate customer purchases.
Currently the stock is trading at just 10.5 times projected 2020 eps and at about 10.8 times projected 2020 free cash flow. This is a remarkable bargain for a company that is projected to grow eps by 25% y/y and for a company that has a long history of growth. Many other stocks with comparable growth histories are trading at 20x eps or higher in the market. It is also a significant discount to the 5 year average p/e for the stock which is around 18. Casey's General Stores (CASY), another convenience store chain, sells at about 22 times 2020 eps. That company has inferior growth to Couche Tard. Couche Tard also posts significantly superior numbers for ROE (26% vs. 16%) and Net Profit Margin (6.8% vs. 3.5%) vs. CASY - numbers projected for 2020 by Value Line. The balance sheet for Couche Tard is solid with rising cash levels and a healthy debt to equity ratio of 53%. Value Line gives the company an A for Financial Strength.
Couche Tard has never traded at multiples that would be normal for a company with its strong growth record. I believe there are a number of reasons for this. First the stock only trades on the Toronto Exchange (ATD.B.TO) or on the pink sheets (OTCPK:ANCUF). Many US investors do not like to buy stocks on foreign exchanges. Buying Pink sheet issues is also not possible for many accounts. The second reason is that the company has been under the control of the four founders through a special ownership structure (see discussion below). Many large institutions do not like to buy stocks with large insider control. Also perhaps the stock is given a discount since much of the growth has been accomplished via acquisitions
Since the recent price drop in January following the aborted Carrefour deal there have been several insider buys including a $2.3 MM Canadian purchase on January 22 and a $942,000 (Canadian) purchase by Richard Fortin on January 25. The company also has a 33 MM share buyback plan in place.
The Approaching change in ownerships structure
For more than the last decade one of my investment approaches at Freedom Mountain Investments is to track companies with high levels of insider ownership and control. I have found that these companies may sell at a significant discount since large institutions avoid investing in them. I have deemed this the "Venerable Owner" strategy. At some point the person with the controlling interest may decide to retire. In order for that person to obtain the full value of ownership it may be necessary to sell the entire company which often occurs at a significant premium to the market value. In other situations, if the venerable owner passes, a sale may occur if none of the heirs are involved in running the company. This strategy has correctly predicted the outcomes for a number of such situations including Noland, Valley National Gas, Arden Group, Syntel and others.
Since its founding of CoucheTard, the company has operated with a dual class share structure. This structure has allowed the four original company directors (Bouchard, Jacques D'Amours, Richard Fortin, and Real Plourde) to retain control of the company. This structure is scheduled to be terminated when D'Amours reaches 65 in December 2021. A proposal to change the termination was not moved forward in 2016 due to shareholder opposition. As a result Couche Tard could become the target of outside bidders after this year.
So the future control of the company could become increasingly complex. Bouchard has stated that he is not interested in leaving a business to his children that they do not control. His daughter Karinne has been involved with the company as head of Investor Relations and Treasurer. But none of the other Bouchard children or the children of the four "founders" has had any major leadership role that I could find.
Bouchard himself is 72 years old but he is still very active in all decisions. He was reportedly on the plane that flew to Paris in connection with the aborted Carrefour deal. But he clearly realizes that maintaining control of the company will be more difficult after 2021. I believe that his preference would be to stay with the company for another 5 years, helping to push it to the next level. But that might not be possible.
A private equity firm might be the most likely at taking a shot at acquiring Couche Tard once the new structure is in place. When acquisitions are contemplated the name of Berkshire Hathaway often comes up. Some companies embrace Berkshire to avoid the slash and burn that may occur with other acquirers. I note that the Berkshire subsidiary McLane is already a supplier to Couche Tard. Berkshire has already made a large investment in a similar business Pilot Flying J (Truck stops).
Conclusions and Actions
The stock appears to be clearly undervalued by as much as 30-50% or even more. 2021 will be a critical year as Couche Tard prepares for the change in ownership structure. This change could very well be a key to unlock hidden value for shareholders. I believe that the company will be very active in exploring and possibly completing a major acquisition. However, this is not an easy task given the high valuation of most of the possible acquisition targets. A sale of the company after December 2021 is not out of the question as pressure from possible acquirers increases.
I have been a shareholder for a number of years. I exited briefly when the Carrefour deal was announced but since that deal is now off the table, I have increased my position in personal accounts and in accounts managed for Freedom Mountain Investment clients.
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Analyst’s Disclosure: I am/we are long ANCUF, ATD.B. 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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