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An aggressive acquisition strategy that involves grabbing a growing share of Canada's gas station market is helping to drive up shares of Parkland Fuel Corp.
While some investors worry they may have missed the run, given the stock's nearly 20-per-cent surge over the past month, the rich dividend is keeping many interested.
"I like this company. There aren't that many decent, clean yield stories," says John Stephenson, chief executive officer of Stephenson & Co. Capital Management, who doesn't own the stock now, but is looking at buying it.
"The only knock is that it's had such a good run, it's hard to see it going much higher. But if you can get an almost 4-per-cent yield and see it go sideways, it's not the worst thing that can happen. It's had one heck of a return in the last 12 months."
Shares of the Red Deer, Alta.-based company, Canada's largest independent seller of commercial and retail fuels with more than 1,500 stations under brands such as Fas Gas Plus, Pioneer and Esso, are up 30 per cent over the past year and trading near record highs.
The stock has climbed about 20 per cent since Aug. 22, when Parkland announced its latest and largest deal to date: the $965-million purchase of the majority of Texas-based CST Brands Inc.'s Canadian business, including hundreds of gas stations under the Ultramar brand and others in Quebec and Atlantic Canada. Parkland bought the assets from Laval, Que.-based Alimentation Couche-Tard Inc., which bought CST in a separate $3.7-billion (U.S.) all-cash deal. The transaction hasn't yet closed.
A handful of analysts have raised their price targets on the stock since the deal was announced. The consensus over the next year is $31.47, which is about a 6-per-cent increase to where the stock is now trading. Among nine analysts who cover the stock, three have a "buy" and six a "hold."
"We have been bullish on Parkland for a while now," says National Bank Financial analyst Trevor Johnson, citing the company's growth-by-acquisition mandate. Mr. Johnson has a "buy" recommendation on the stock and recently increased his target to $34 from $28.
"It's one of the better businesses to integrate. You get better synergies … as you buy more, you get more of a bulk discount."
The company has been shifting its revenue mix to include more retail gas stations, which is a more stable and profitable segment, notes Toronto-Dominion Bank analyst Michael Van Aelst. He has a "buy" on the stock and recently moved up his target to $34 from $27.
When the CST deal closes, about 55 per cent of Parkland's profit will come from retail gas stations, and the rest from its supply and wholesale and commercial divisions, which have been affected by the downturn in the oil and gas industry.
"We remain constructive on PKI as it actively pursues its roll-up strategy," CIBC World Markets analyst Kevin Chiang said in a note, referring to the company's stock symbol. He raised his target price to $31.50 from $26 and has a "sector performer" rating (similar to "hold").
AltaCapital Corp. analyst Dirk Lever increased his target to $32.50 from $25, and also kept his "sector perform" rating.
Chief executive officer Bob Espey said the company still has room to increase its market share across its divisions, both through acquisitions and from existing operations across Canada and in the northwest United States.
"We will continue to grow our footprint," Mr. Espey said. "The nice thing about our business is that we are in multiple channels and multiple products and we see opportunities across those channels and products both organically and through [mergers and acquisitions]."
Risks for the company include competition and rising oil prices, which could lead to lower sales at the gas pump. Over the long term, the company's profit could also be affected by the anticipated growth in sales of hybrid and electric vehicles.
Ryan Modesto, managing partner with 5i Research, says Parkland is a good way to play the energy industry amid lower oil and gas prices, with more people not only filling up their tanks but also using spare change to buy snacks and lottery tickets at the attached convenience stores.
"It's not one we would call cheap, but it's also not something we're overly concerned with regarding valuation," Mr. Modesto says. That said, he warns the next two quarters may be "choppy" as the company digests the CST acquisition.