The loss of a major supply contract and more recently the departure of its chief financial officer aren't seen as setbacks for Parkland Fuel Corp., as investors count on the company to keep driving growth through acquisitions.
Shares of Red Deer, Alta.-based Parkland, Canada's largest independent seller of commercial and retail fuels, are trading near record highs and analysts believe there's more money to be made.
Parkland, which delivers fuel to energy, mining and forestry operations and runs about 700 gas stations under such brands as Fas Gas, Esso and Race Trac, is in the midst of a five-year plan to boost earnings through cost cuts and buying up competitors.
It has made two large acquisitions since the start of 2013 that are helping to replace the economic benefit of a contract it had with Suncor Energy Inc., which wrapped at the end of December. The contract allowed Parkland to share in the benefits from strong refining margins.
Analysts say the company has a strong balance sheet to support more acquisitions, while still offering a steady dividend yielding about 5 per cent.
"We think it's a really good growth story, wrapped up in a yield name," says Andrew Pink, portfolio manager at LDIC Inc., which owns Parkland in both its infrastructure and yield funds.
"They aren't making huge bets. They're buying things in their wheelhouse and there is a huge market opportunity for them."
Among eight analysts that cover Parkland, five have a "buy." Three say "hold," but also see an upside for investors.
"To date, the company has done a great job finding quality acquisitions and a high level of synergies," says CIBC World Markets analyst Kevin Chiang, who has a "sector performer" (hold) on the stock and $22.25 price target.
That's still about 10 per cent above where Parkland is currently trading, and slightly ahead of its record high of $21.99 on March 7, shortly after the company increased its annual dividend by 2 cents to $1.06 a share, which is paid out monthly.
It also reported record earnings before interest, taxes, depreciation and amortization (EBITDA) of $207.4-million in 2013, driven by its purchase of Elbow River Marketing LP, which moves petroleum products by rail. Earlier this year, the company closed its deal for commercial fuel provider SPF Energy Inc., expanding its operations in the U.S. Northwest.
"The key to the story is the acquisition upside for commercial fuel distribution," said National Bank Financial analyst Trevor Johnson, who has an "outperform" (buy) on the stock and $23 price target. "The more you do, the more money you can make because you can buy [fuel] more cheaply."
Parkland shares pulled back this spring as investors waited to see what first-quarter profit would look like without the benefits from the agreement with Suncor, which gave notice in late 2010 that its supply contract would be terminated at the end of 2013.
The results were better than expected, with Parkland reporting record first-quarter EBITDA of $61-million.
Canaccord Genuity analyst Derek Dley said the company leveraged its recent acquisitions and expects more deals to come. "We see them continuing to consolidate the fuel distribution market. That's going to be positive for them," said Mr. Dley, who has a "buy" and $22 target on the stock.
Parkland chief executive Robert Espey said the company wants to expand further in Western Canada, where it does most of its business, but also in the northern United States as well as Quebec and Ontario.
"We operate in a space that's consolidating at a rapid pace and we're the ideal candidate to consolidate that industry," he said in an interview.
Analysts have said they aren't concerned about the departure next month of Parkland chief financial officer, Michael Lambert, who is taking the same title at energy services firm Black Diamond Group Ltd.
Mr. Espey said Parkland is sorry to lose Mr. Lambert, but "we're comfortable to proceed without him."