Convenience-store chain companies are much in favour as they had responded to the recession by offering more promotions and providing more value. And as the economy improves, so will sales at these stores, many of which are located in gas stations.

Although a research report from TD Newcrest, a division of TD Securities Inc. in Toronto, says there have been “clear signs of a recovery in in-store traffic first and, more recently, basket size,” only a gradual recovery in industry sales is expected, which will accelerate only when a pickup in the economy leads to more construction and employment-related traffic in the stores.

As well, the recession had resulted in many store closures among the weaker players, which is lowering overall store counts while providing acquisition opportunities for the survivors.

As a result, there are “buy” ratings on Laval, Que.-based Ali-men-tation Couche-Tard Inc. , Ankeny, Iowa-based Casey’s General Stores Inc., Sanford, N.C.-based the Pantry Inc. and Corpus Christi, Tex.-based Susser Holdings Corp.

Couche-Tard is the biggest, with about 4,000 locations in the U.S. and 2,000 in Canada. Pantry has 1,700 stores; Casey’s, 1,500; and Susser, 500.

Couche-Tard had tried to take over Casey’s in a hostile bid but was unsuccessful. Analysts doubt that Couche-Tard will make a bid for either of the other two U.S.-based chains. However, the TD Newcrest analysts believe Couche-Tard may look to Europe for its next major acquisition.

Says an Oct. 21, 2010, report from TD New-crest: “We believe that the western European market could be at the same stage as the U.S. was a decade earlier, when Big Oil started divesting its sizable retail networks at reasonable valuations.”

The report adds that the Neth-erlands-based Royal Dutch Shell PLC, Chevron Corp. in San Ramon, Calif., and Total SA in France “have all indicated that they are either selling assets or that they have an interest in exiting certain markets” in their convenience-store operations. London-based BP PLC also could sell some of its substantial retail assets as well.

In the meantime, there’s much consolidation going on in the sector in the U.S., but it’s piecemeal. For example, in the period of July 10, 2010, to Oct. 12, 2010, there were 20 announcements of stores for sale, according to the TD Newcrest report. The offerings ranged from six to 83 stores.

A closer look at the four retail firms:

> Alimentation Couche-Tard Inc. The TD Newcrest report rates the stock as an “action list buy” — the highest recommendation possible by the firm, with a 12-month price target of $32. Couche-Tard’s 185 million outstanding shares closed at $27.63 on Jan. 7.

The TD Newcrest report notes that Couche-Tard’s size is a big help: “Couche-Tard’s substantial efficiency gains over the past year, immense buying power and solid balance sheet should position it well to lead the industry through the recovery, while also participating in industry consolidation in North America and, potentially, Europe.”

Research reports by Bill Chis-holm, an analyst with Montreal-based MacDougall MacDougall & MacTier Inc. in Toronto, and analysts with Desjardins Securities Inc. in Toronto also have “buy” ratings on the stock, with price targets of $30 and $29, respectively.

A report from Toronto-based UBS Securities Inc. rates Couche-Tard as “neutral,” although its price target is only slightly lower at $28.50.@page_break@The Desjardins report says Couche-Tard will continue to “generate strong operating metrics over the next year, which should translate into share price appreciation.” The report points to the company’s growing fresh food program and increasing market share — adding that Couche-Tard should see additional savings from its cost-containment program.

In addition, the Desjardins report anticipates Couche-Tard making more “small tuck-in acquisitions,” noting that the challenging economy has led to store closings in parts of Canada and the U.S. Midwest.

With the failure of the Couche-Tard takeover bid for Casey’s, the Canadian firm is using its cash flow to buy back shares and retire debt. It also has raised its quarterly dividend to 5¢ from 4¢ when announcing its financial results for the second quarter of fiscal 2011, ended Oct. 10, 2010.

Couche-Tard’s revenue was $8.5 billion for the six months ended Oct. 10 vs $7.5 billion in the corresponding period the year prior. Net income was $242.1 million in the latest period, excluding net costs of $7 million related to the Casey’s takeover bid, vs $179.3 million.

> Casey’s General Stores Inc. This firm, which Chisholm’s report describes as “very profitable and very well run,” had to add to its debt load in its efforts to defeat Couche-Tard’s takeover bid, resulting in long-term debt of US$679.2 as of Oct. 31 vs US$154.8 million six months earlier.

A survey of eight reports by analysts shows four with “strong buy” ratings for the stock, one with a “buy” rating and three with “hold” ratings. Share price targets range from US$39 to US$52.50. The 37.9 million outstanding shares closed at US$40.46 on Jan. 7.

Casey’s revenue was US$2.7 billion for the six months ended Oct. 31 vs US$2.3 billion in the corresponding period the year prior. Net income was about US$75.5 million, excluding US$16.5 million related to the hostile takeover bid and recapitalization, vs US$77.8 million.

> The Pantry Inc. Chisholm’s report says Pantry’s earnings are more volatile than Casey’s and that the former has always carried a significant amount of debt on its balance sheet. In addition, the economy is weak in Florida, which is a major market for the company.

Of the five analysts’ reports on Pantry, three had “strong buy” ratings, one a “buy” and one rated it a “hold.” Price targets ranged from US$22 to US$29. The 22.7 million outstanding shares closed at US$18.50 on Jan 7.

Pantry’s revenue was US$3.9 billion for the six months ended Sept. 30 vs US$3.4 billion in the corresponding period in 2009. Net income was US$26.6 million vs US$11.8 million.

Susser Holdings Corp. Four of the nine analysts’ reports on Susser had “strong buy” ratings, two rated the firm a “buy” and three rate it a “hold.” Price targets range from US$11 to US$19. The 17.4 million outstanding shares closed at US$13.23 on Jan. 7.

Although the report from New York-based J.P. Morgan Securities LLC has the lowest price target at US$11, it says Susser is one of the few companies in this sector that has “significant growth potential,” noting that management plans to double earnings before interest, taxes, depreciation and amortization over the next four to five years through acquisitions and organic growth.

Susser’s revenue was US$2 billion for the six months ended Oct. 10 vs US$1.7 billion in the corresponding period the year prior. Net income was US$7.1 million vs US$8.7 million. IE