When Alimentation Couche-Tard Inc.  reports its second-quarter fiscal 2023 financial results after the bell on Tuesday, Desjardins Securities analyst Chris Li expects continuing strong fuel margins and healthy merchandise same-store sales growth south of the border.

He’s projecting revenue of US$16.814-billion for the quarter, up from US$14.22-billion a year ago but below the Street’s forecast of US$17.37-billion. Adjusted earnings per share are expected to grow to 84 US cents, matching the consensus, from 65 US cents a year ago.

“We expect sales to benefit from the Fresh Food, Fast (FFF) rollout, inflation, strong growth in private label and effective promotion/localized pricing by leveraging enhanced data analytics, with a partial offset from the continuing decline in cigarettes (pricing and volume pressures) and the illicit market in Canada,” said Mr. Li. “We forecast SSSG of 4.0 per cent/1.5 per cent/-2.0 per cent in the U.S./Europe/Canada. We expect higher spoilage from FFF to impact margins in the U.S.

“We expect ongoing softness in fuel volumes (SSV to decline 3.0 per cent/5.0 per cent/4.0 per cent in the US/Europe/Canada) due to high prices and work-from-home. However, this is more than offset by continuing strong fuel margins, supported by cost pass-through (rational competition) and margin-enhancement initiatives. We forecast a record quarterly fuel margin of US52 cents per gallon in the U.S.”

Raising his 2023 and 2024 EBITDA projections despite declines to his revenue estimates, Mr. Li increased his target for Couche-Tard shares to $69 from $65. The average is $70.49.

“We believe valuation is supported by funds flow to staples that will benefit from an improvement in macro conditions next year, upside to cash flows from fuel margins remaining elevated and value creation from a strong balance sheet (strategic acquisitions and/or share buybacks),” he said. “Management believes rising interest rates and the likelihood of a recession could result in more M&A opportunities at reasonable valuations.”

Elsewhere, National Bank’s Vishal Shreedhar moved his target to $69 from $68 with an “outperform” recommendation.

“Our favourable view on the shares reflects increasing confidence that ATD’s fuel margins will continue to show strength (improvement initiatives), potential for higher deal flow (acquisitions), and an accommodative valuation,” he said.