Ontario Alcohol Sales And Caribbean Investments Will Strengthen Future Prospects

Key Takeaways

• Strategic review and potential restructuring aim to unlock value and optimize the business, impacting revenue and earnings.
  
• Market share gains through rewards and partnerships could enhance customer loyalty and convenience store revenue.
  
• Political instability, tariffs, and weak demand pose risks to Parkland's revenue, profitability, and financial stability, with poor U.S. and refinery performance compounding challenges.

Catalysts

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

• The strategic review initiated by Parkland's Board seeks to explore various strategic alternatives, including mergers, divestitures, acquisitions, and the sale of the company, which could unlock intrinsic value and optimize the business portfolio, potentially impacting revenue and earnings.
  
• Increased membership in JOURNIE Rewards and strategic partnerships has led to significant market share gains, which could boost revenue through enhanced customer loyalty and spending at convenience stores.
  
• Parkland's expansion in alcohol sales in Ontario due to regulatory changes presents an opportunity to grow retail revenue from convenience stores, which typically offer higher margin products.
  
• Infrastructure investments in the Caribbean and the economic growth in countries like Guyana and Suriname are positioned to drive volume and margin growth, positively affecting international segment revenue and earnings.
  
• Restructuring of the U.S. business, including cost reductions and enhanced supply chain efficiencies, is expected to improve the operational performance, contributing to higher net margins and improved EBITDA in future periods.

Parkland Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Parkland's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 2.4% in 3 years time.
• Analysts expect earnings to reach CA$759.4 million (and earnings per share of CA$5.94) by about April 2028, up from CA$127.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, down from 44.1x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 0.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.06%, as per the Simply Wall St company report.

Parkland Future Earnings Per Share Growth

Risks

• Political instability and U.S. tariffs could introduce volatility and negatively impact Parkland’s operational results, potentially affecting revenue and profitability due to trade uncertainties.
  
• The company experienced weak fuel demand and soft consumer discretionary spending in 2024, which could persist or worsen, ultimately impacting revenues and margins.
  
• The U.S. segment underperformed due to unfavorable market conditions, including competition and compressed retail fuel margins, which could continue to affect earnings if not mitigated.
  
• The Burnaby Refinery's performance was below expectations due to unplanned outages and lower refining margins, which could continue to affect net margins and earnings if such issues recur.
  
• Parkland’s leverage ratio increased to 3.6x, driven by lower refining margins, raising concerns about its ability to manage debt effectively, potentially impacting financial stability and earnings.

Valuation

• The analysts have a consensus price target of CA$46.833 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$55.0, and the most bearish reporting a price target of just CA$42.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$32.3 billion, earnings will come to CA$759.4 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 8.1%.
• Given the current share price of CA$32.21, the analyst price target of CA$46.83 is 31.2% 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.