The share price of Caltex Australia Limited (ASX: CTX) isn’t helped by speculation that it is eyeing a $1 billion acquisition to fill an earnings hole.
The stock slumped 1.1% to $30.24 in early trade even as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index recovered from an initial sell-off to trade 0.1% higher at the time of writing.
Caltex is reported to be running the ruler over chemicals company Ixom, which used to be part of Orica Ltd (ASX: ORI), and is preparing to lob a bid into the upcoming auction for the business, according to a news report in the Australian Financial Review.
The fuel suppler and retailer needs to find a new growth lever as it faces the trend towards electric vehicles and the loss of a $150 million supply contract with Woolworths Group Ltd (ASX: WOW).
This isn’t unlike the dilemma facing Wesfarmers Ltd (ASX: WES). The conglomerate is playing down its eagerness to make an acquisition to escape its ex-growth image – but let’s face it, Wesfarmers is no income stock and if you aren’t growth or income, then what are you?
I think Caltex is more realistic on this front (but then its share price is faring much worse than Wesfarmers) as it’s seen the limited and temporal impact of its recent profit upgrade. It’s good but it doesn’t answer the more burning question of “what’s next?”.
Buying a business like Ixom could provide that answer. If the deal goes ahead, it will be the first acquisition of note that is outside Caltex’s core fuel business.
That’s the kind of acquisition that could reignite interest in the stock from investors struggling to understand how it will survive the electric vehicle revolution.
Ixom touts itself as the market leader in water treatment and the distribution of chemicals used in everyday personal products and food – two industries that won’t go out of fashion, which is more than what we can say about fossil fuels.
But acquisitions aren’t the only potential catalyst for the stock. Caltex could also excite the market by splitting itself into a fuel and chemicals supplier and a retailer with its petrol stations and convenience stores.
This same strategy could also benefit Telstra Corporation Ltd (ASX: TLS), but I digress.
Caltex could also look to sell its retail outlets and lease them back to release further cash to grow its business.
Its underperforming share price and its multiple growth options make Caltex a buy in my book.
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Motley Fool contributor Brendon Lau owns shares of Caltex Australia Ltd. and Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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