A member of Pat McKeough’s Inner Circle recently asked about the pullback in the shares of a Canadian stock specializing in gas stations, convenience stores and fuel distribution. Before retreating, the shares had surged in the wake of the company’s most recent acquisition, the result of a three-part deal.
Revenue for this stock also surged in the most recent quarter, and it maintains a high-yielding dividend. Pat observes that the company’s rapid growth-by-acquisition strategy adds debt and risk. It may be able to improve profit margins, he adds, with cost savings and economies of scale.
Q: Hi, Pat. I appreciate your advice and would like your thoughts on Parkland, which has seen a substantial pullback in the last little while. Thanks.
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A: PARKLAND FUEL CORP. (symbol PKI on Toronto, www.parkland.ca) operates gas stations, convenience stores and a fuel-distribution business for motorists, businesses, households and wholesale customers in Canada and the U.S.
The company’s shares have moved down from a new high of over $32 in May to today’s price near $25.
Parkland’s shares had moved up from around $23 last August to that new high mostly due to a recent deal. Alimentation Couche-Tard (Toronto symbol ATD.B), as part of its arrangement to buy U.S. based convenience chain CST Brands, agreed to sell a significant portion of CST’s Canadian assets to Parkland for $986.0 million. Those assets mainly consisted of Canadian CST refuelling stations. Parkland also got CST’s Canadian head office in Montreal.
The share drop came despite higher revenues and improved cash flow in the latest quarter (which did not include the results of the CST acquisition).
In the three months ended June 30, 2017, Parkland’s revenue rose 15.1%, to $1.81 billion from $1.57 billion. However, cash flow rose just 4.9%, to $38.5 million from $36.7 million. The lower cash flow was partly due to an early end to winter that cut seasonal demand for high-margin home-heating propane. Cash flow per share fell 10.3%, to $0.35 from $0.39, on more shares outstanding from acquisitions.
Growth stocks: Acquisitions include Esso stations and Chevron refinery
The Alimentation Couche-Tard purchase followed other big acquisitions.
In March 2016. Parkland bought Esso stations in Saskatchewan and Manitoba as part of a deal by Imperial Oil to sell its remaining 497 Esso retail stations in Canada to five fuel distributors for $2.8 billion.
Earlier this year, Parkland also agreed to buy Chevron’s downstream operations in British Columbia for $1.5 billion. These include an oil refinery in Burnaby, 129 gas stations in the Vancouver area and a business that supplies fuel to the Vancouver International Airport.
Parkland is in a highly competitive business, and its rapid growth-by-acquisition strategy adds risk—as well as debt. That now stands at a somewhat high $1.84 billion, or 54% of the company’s market cap.
However, Parkland has lots of room to improve profit margins with cost savings and improvement of economies of scale for its operations. This includes upgrading/renovating the convenience stores at the gas stations it’s now bought.
Parkland trades at 14.6 times this year’s forecast cash flow of $1.71. It trades at just 10.6 times next year’s estimate of $2.36. The shares yield a high 4.6%.
Inner Circle recommendation: Parkland Fuel is okay to hold, but only for aggressive investors.
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