If you were to look for common ground on Parkland Corp. (PKI-T), something that shareholders, company executives and Bay Street analysts have been hard-pressed to find, you would discover this: A lot of them believe that the stock is cheap.
But what should Parkland do about its bargain status? Ooh, that’s where the dissension begins, leaving investors to contemplate an attractive stock as a shareholder dispute heats up.
The Calgary-based company operates gas stations and convenience stores in Canada, the United States and the Caribbean, along with a fuel refining business. Its banners include Ultramar, Pioneer, Esso and On The Run.
The share price has surged 36 per cent over the past year, compared with the 5-per-cent gain for the S&P/TSX Composite Index over the same period – no doubt powered by Parkland’s net earnings growth of 52 per cent in 2023 and a prospect of a shareholder-led upheaval.
But this recent performance isn’t mollifying Simpson Oil, Parkland’s largest shareholder, which owns a 19.7-per-cent stake in the company.
Simpson wants Parkland to conduct a strategic review of its operations, which could involve putting the company on the block. It has some support. Engine Capital LP, a New York-based hedge fund that owns a thinner slice of Parkland, said this week that the company should put itself up for sale after urging it in January to refresh its board of directors.
So far, Parkland has rejected these overtures, responding with a statement this week that said a strategic review is unnecessary.
At the heart of this dispute is an unloved stock. Despite recent gains, the stock has underperformed over the longer term. Its annualized return over the past five years, including dividends, is just 5.5 per cent. That’s well behind the S&P/TSX Composite Index’s annualized gain of 8.9 per cent over the same period.
The stock’s valuation is at a steep discount to Parkland’s peers.
According to Bloomberg figures, the shares trade at just 14 times this year’s estimated earnings. Alimentation Couche Tard Inc. (ATD-T), a Canadian rival with a global network of convenience stores and gas stations, trades at a more robust valuation of 19 times estimated earnings.
Using another method of valuation, Parkland’s total value is about 5.5 times estimated 2025 EBITDA – earnings before interest, taxes, depreciation and amortization – of $2.2-billion.
That’s cheap next to other convenience store retailers, such as Couche Tard, Murphy USA Inc. (MUSA-N), ARKO Corp. (ARKO-Q) and Casey’s General Stores Inc. (CASY-Q) These stocks trade at a multiple of more than 10, according to Ben Isaacson, an analyst at Bank of Nova Scotia.
Mr. Isaacson thinks the stock deserves a valuation of seven times EBITDA, which is still below that of its peers but in line with Parkland’s long-term average. This higher valuation implies a share price of $60, or 39 per cent above the current price of $43.25.
Kevin Chiang, an analyst at CIBC Capital Markets, has an interesting theory about why the discount exists: Parkland is classified as an energy stock in the S&P/TSX Composite Index, but generates most of its revenue through its retail operations. That provides investors with a weak bet on rising energy prices.
“As oil prices have moved higher, we believe fund flow favoured energy-producing companies that have greater earnings leverage to higher commodity prices,” Mr. Chiang said in a note this week.
But the case for holding the stock during this shareholder squabble is persuasive.
Let’s say that the disgruntled shareholders have a point. Parkland can either streamline its operations to become a more efficient and profitable company, or it can look for a buyer that will pay a premium for a company that is undervalued.
Either way, the investors could be rewarded with a higher share price.
Now let’s say that the shareholder dispute blows over, Parkland stays independent and investors’ hopes of a lucrative takeover are dashed.
In this case, investors are left with a stock that just about everyone agrees is cheap – and a company that has potential for growth.
Parkland executives in November outlined plans to increase EBITDA at a compound annual growth rate of 8 per cent through 2028, along with cost-savings, debt repayment and acquisitions that could help drive the stock further. And the bonus here is that some shareholders believe the company can perform significantly better.
Sure, there appears to be a lot of disagreement over how this growth can be achieved, and who should be leading the company. But investors don’t have to pick a side to come out winners.
David Berman