National Bank National Bank Financial analyst Vishal Shreedhar expects “strong” fuel margins to offset rising expenses when Alimentation Couche-Tard Inc. reports its third-quarter financial results on Aug. 30.
“We examined recent commentary from some of ATD’s peers, suggesting the following trends: (a) Higher prices have led to lower volumes, but most peers have been optimizing margin dollars; (b) Peers have been benefitting from unusual fuel market volatility – elevated margins to continue through the year (though tapering from recent highs); (c) The c-store industry is resilient and has historically grown during recessions; (d) Cost pressure has created M&A opportunities for larger operators; (e) A return to pandemic behaviour – consumers coming more often (though driving less) with smaller baskets,” he said in a research note released Wednesday.
Mr. Shreedhar is projecting quarterly earnings per share of 74 cents, up 3 cents from the same period a year ago and 11 cents higher than the Street’s forecast. He expects merchandising same-store sales growth of 1.5 per cent in the United States and 3.0 per cent in Canada, both above from a year ago (declines of 0.2 per cent and 9.6 per cent, respectively).
“Our forecasts reflect elevated fuel margins in North America, fuel volume growth in Canada/Europe, and share repurchases, partly offset by heightened SG&A growth, higher interest expense, and unfavourable aggregate F/X,” he said.
The analyst is expecting comparable fuel volume growth of 2.0 per cent in Canada and a decline of 4.0 per cent south of the border. However, he’s expecting substantial fuel margin growth in both regions.
“OPIS data suggests U.S. national average fuel margins of about 41.6 cents per gallon during ATD’s Q1/F23 (our estimate reflects 47.6 c/g),” Mr. Shreedhar said. “We highlight that since Q1/F21, ATD’s U.S. fuel margins have outperformed OPIS data by 7.0 c/g (on average); this compares to quarterly outperformance of about 1.7 c/g over the past 5 years (on average). Our understanding is that ATD has benefitted from growing scale, improved logistics, and the Circle-K fuel rebranding. We highlight that beyond the quarter, OPIS fuel margins continued to remain elevated, averaging about 71 c/g for the first 3 weeks of Q2/F23.”
Though he warned elevated fuel prices have “impacted demand” and could weigh on results in the quarters to come, Mr. Shreedhar raised his earnings per share projections for 2023 and 2024 to $2.71 and $2.90, respectively, from $2.46 and $2.86, leading him to increased his target for Couche-Tard shares to $63 from $59 with a “sector perform” recommendation (unchanged). The average target on the Street is $63.44.
“Though we believe that Couche-Tard has solid longer-term growth prospects (network development, merchandising improvement, fuel optimization, capital return to shareholders, and potential acquisitions), limited near-term growth expectations keep us on the sidelines,” he said.