Is this Canadian Growth Stock to Consider on Dip?

Alimentation Couche-Tard (TSX:ATD), a standout TSX growth stock, has consistently outperformed in the market, generating substantial wealth for long-term investors. Over the past two decades, it has delivered impressive annualized returns of over 20%. With an annualized return exceeding 18% in the last decade, ATD presents an enticing opportunity for portfolio growth. This article offers an in-depth analysis of Alimentation Couche-Tard, exploring its business model, financial performance, and future prospects, aiding in your decision-making process for portfolio diversification. 

Alimentation Couche-Tard (TSX: ATD) 

Alimentation Couche-Tard is a global leader in the convenience store industry, known for its aggressive acquisition strategy. The company operates a vast network of convenience stores, many of which also offer roadside fuel services. In its most recent presentation, Couche-Tard revealed that approximately 65% of its transactions are convenience-only, 25% are fuel-only, and 10% are a combination of both. 

Couche-Tard generates about 66% of its revenues in the United States, 21% in Europe and other regions, and 13% in Canada. This geographical diversification is a strategic advantage, allowing the company to mitigate risks associated with economic downturns in any single market.  

The company's revenue is primarily derived from fuel sales, which account for 74% of total revenue, while merchandise and service sales contribute 24%. In terms of gross profit, fuel accounts for 50%, and merchandise and service make up 49%. This balanced profit mix underscores the company's ability to generate substantial income from both fuel and non-fuel products. 

Strategic Acquisitions and Financial Discipline 

Couche-Tard's growth strategy has historically relied on strategic acquisitions and operational synergies. The company maintains strict financial discipline, ensuring that it pays reasonable multiples for acquisitions and focuses on paying down debt before embarking on new large-scale purchases. This approach has enabled Couche-Tard to consistently generate increasing cash flows and enhance shareholder value. 

The company's impressive long-term stock returns are driven by its rising earnings and cash flows. Over the past decade, Couche-Tard has increased its adjusted earnings per share at a compound annual growth rate (CAGR) of 22.5%. Additionally, its five-year return on equity (ROE) of 23% highlights the management's excellence in capital allocation. 

Couche-Tard's commitment to returning capital to shareholders is evident in its 15-year dividend growth rate of 24%. The company recently announced a dividend hike of 25% in November, indicating no signs of slowing down. This robust dividend growth is a testament to Couche-Tard's strong financial health and its ability to generate substantial free cash flow. 

Shift Towards Organic Growth 

Looking ahead, Couche-Tard's management expects organic growth to play a more significant role in its expansion strategy. The company anticipates that organic growth will contribute approximately 50% of its overall growth in the coming years. This shift towards organic growth may be one reason why the stock has recently dipped 12% from its 52-week high, as the market awaits validation of this new strategy. 

As part of its future growth plans, Couche-Tard is investing in the transition to electric vehicle (EV) charging stations. In the past three fiscal years, approximately 38% of its operating cash flow has been allocated to capital spending. In the trailing 12 months (TTM), this figure increased to 47%. Despite these significant investments, Couche-Tard continues to generate substantial free cash flow, with its TTM free cash flow exceeding US$4 billion. This strong cash flow generation allows the company to comfortably fund its dividend payments, which totaled less than $355 million in the same period, representing a payout ratio of under 9%. 

At the current share price of $76.71, Couche-Tard trades at approximately 19.6 times earnings. This valuation is considered reasonable given the company's potential for earnings growth of over 10% per year in the coming years. Analysts agree that Couche-Tard is a decent buy at these levels. The consensus 12-month price target suggests a discount of about 12% from the current price, indicating that the stock is undervalued relative to its proven business model and growth prospects. 

Alimentation Couche-Tard has demonstrated a consistent ability to create value for its shareholders through strategic acquisitions, financial discipline, and a balanced revenue mix. The company's strong financial performance, robust dividend growth, and strategic shift towards organic growth position it well for the future. Despite recent stock price fluctuations, Couche-Tard's long-term growth potential and solid fundamentals make it an attractive investment option. 

Investors seeking a reliable and resilient stock with a proven track record of generating substantial returns should consider adding Alimentation Couche-Tard to their portfolios. Its reasonable valuation and analyst consensus further support the case for buying this growth stock at current levels.