JOURNIE Loyalty Program And On The Run Conversions Will Drive Revenue Growth And Boost Margins

Key Takeaways

• Parkland's growth in retail and commercial sectors is driven by loyalty programs, store conversions, and potential alcohol sales increases store traffic and margins.
  
• U.S. operational improvements and strategic divestments aim to reduce costs, strengthen the balance sheet, and improve shareholder value.
  
• Parkland's lower refinery margins, increased leverage, and reduced EBITDA guidance signal potential financial instability and challenges in meeting future earnings targets.

Catalysts

Operates food and convenience stores in Canada, the United States, and internationally.

• Parkland is positioned to grow its Retail and Commercial businesses, supported by the continued success of its JOURNIE loyalty program and On The Run store conversions, expected to drive traffic and boost sales, impacting future revenues.
  
• The company's initiative to offer alcohol sales at selected sites is a growth opportunity that showed promising early results, potentially contributing to increased store traffic and margins.
  
• Parkland's U.S. operations are expected to see improved EBITDA due to renegotiated supply contracts and operational improvements, which aim to increase margins and reduce costs.
  
• The anticipated decrease in leverage ratio by focusing on debt repayment and strategic divestments like the sale of its Florida business is targeted to strengthen the balance sheet, which can enhance shareholder value and potentially lead to increased EPS.
  
• The consolidation of Parkland's supply and trading teams aims to lower costs and optimize supply chain efficiencies, potentially leading to improved net margins and overall competitiveness in the market.

Parkland Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Parkland's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.8% today to 2.7% in 3 years time.
• Analysts expect earnings to reach CA$855.5 million (and earnings per share of CA$6.02) by about December 2027, up from CA$242.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.2x on those 2027 earnings, down from 25.1x today. This future PE is lower than the current PE for the CA Oil and Gas industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 6.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.76%, as per the Simply Wall St company report.

Parkland Future Earnings Per Share Growth

Risks

• Parkland's Q3 financial results were below expectations due to lower refinery margins, which have impacted the company’s overall profitability and cash flow. This could indicate ongoing vulnerability to margin fluctuations and pressure on earnings.
  
• The company’s leverage ratio increased to 3.4x, highlighting that debt repayment was more than offset by lower adjusted EBITDA. This rise in leverage could strain future financial stability and affect free cash flow available for shareholder returns.
  
• The adjusted EBITDA guidance for 2024 has been lowered by approximately $250 million, reflecting a weak refining margin outlook. This indicates potential challenges in meeting future earnings targets.
  
• The International segment saw an 11% decrease in adjusted EBITDA due to lower wholesale volumes. Continued participation in high-volume, low-margin sectors could pressure revenue growth and profitability.
  
• The U.S. segment experienced negative same-store volumes, hinting at broader competitive challenges and potential obstacles to maintaining or growing revenue in this region.

Valuation

• The analysts have a consensus price target of CA$47.54 for Parkland based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$58.0, and the most bearish reporting a price target of just CA$39.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$31.5 billion, earnings will come to CA$855.5 million, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of CA$34.97, the analyst's price target of CA$47.54 is 26.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.