The basic objective of investors is to make money. In stock investing, the strategy is straightforward: buy low and sell high. You’re a winner whether the gain is $1 or $10. However, savvy investors take it further by scouting for undervalued stocks.
Stocks trading below their fair values are buying opportunities. Their prices are depressed temporarily due to several factors, including market conditions. However, the returns or windfall could be substantial when the stock recovers and seeks its actual value.
For instance, the market could be wrong about Parkland (TSX: PKI). The mid-cap energy stock trades at $38.83 per share and is down 8.34% year to date. The 3.61% dividend compensates for the underperformance. Soon, investors expect to earn two more ways: price appreciation and dividends.
Growth platforms
Parkland is Calgary-based and operates globally or in 26 countries. The $6.78 billion company is a fuel distributor and convenience retailer. Management believes that diversified products and geographies form a resilient business model. The retail and commercial businesses and logistics assets are competitive differentiators.
Each of the three core business segments (retail, commercial, and supply) is a growth platform. Parkland is also capitalizing on the adoption of electric vehicles. It has completed 55 ultra-fast electric vehicle (EV) charging stations and expects to build or expand network density through its real estate footprint and federal funding.
Latest quarterly results
In the first quarter (Q1) of 2024, sales and revenue declined 14.9% year over year to $6.94 billion. While sales in Canada and the U.S., the drop in the international markets led to a net loss of $5 million compared to $77 million net earnings in Q1 2023. However, Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 14% to $191 million from a year ago. Notably, the Board approved a 3% dividend hike.
“I have full confidence in our team’s ability to execute our operational plan that leverages our customer advantage and unique supply benefits despite headwinds in some of the markets where we operate,” said, Bob Espey, president and chief executive officer (CEO) of Parkland. He disclosed that the disposition of more than $400 million worth of non-core assets is ongoing. The total target by year-end 2025 is around $500 million.
Unplanned shutdown
A drawback for the business was the unplanned shutdown of Parkland’s Burnaby Refinery in early January due to extreme cold weather. The team had to scramble and accelerate maintenance and refining optimization work initially set for Q3 2024.
Espey added, “We have taken proactive steps to improve organization-wide marketing profitability and enhance the refinery’s utilization and profitability for the remainder of the year. Unfortunately, composite utilization fell to approximately 20%, resulting in an adjusted EBITDA loss of between $60 million and $65 million for Q1 2024.
On April 1, 2024, the Burnaby Refinery safely returned to normal operations with a revised operational plan.
Stock recovery
The subdued business performance at the start of 2024 reflects in the stock’s year-to-date performance, although the trailing one-year price return is +17.23. In the full year 2023, Parkland’s net earnings climbed 36.1% to $471 million compared to 2022. The stock should eventually recover, given the well-positioned assets, supply and logistics capabilities, and refining operations back to normal.
