In a reporting season where failure to meet expectations has been harshly punished by investors, Caltex Australia Limited (ASX: CTX) was able to report a profit increase of 45%.
However, the share price has fallen in tandem with markets since the results.
But were there other reasons investors in Caltex hit the sell button? There may well have been, and the top three are listed here.
Falling volumes
It might not seem like the two businesses have much in common, but Caltex has similar issues to Coca-Cola Amatil Ltd (ASX: CCL). In the case of Caltex, the core business proposition is selling fuel. Falling fuel volumes mean falling revenues and profits, which is magnified when operating leverage is taken into account.
Caltex has a large fixed cost base through its service station and distribution network, which cannot cut costs fast enough to keep pace with falling volumes.
However, there are more cars on the road than before, so on the surface, the fall in volumes is puzzling. The fall in overall volumes is being driven by the falling age of the motor vehicle fleet in the country. Newer cars have more fuel efficient engines, and European, Japanese and Korean car manufacturers all place a premium on fuel efficiency. That suggests that total fuel volumes may well continue to decline.
Easy cost cuts off the table
Caltex management deserves credit for transitioning the business away from being a major refiner to a more pure play retailer. But the costs savings associated with shutting down the capital intensive refinery have been made, and are not able to be repeated in the future.
Accordingly, the results for Caltex going forward have been "re-based" with the current results, and growth in profits now will only be incremental.
Management also signalled that revenue growth in the future might be difficult, quietly omitting a previously stated 5% earnings growth target from the most recent commentary.
Unclear growth plans
Caltex at one time was rumoured to have been interested in the BP service station assets that are spread across the country. But that potential acquisition has recently been removed from the equation, while other competitors have been consolidating and investing in their own operations.
This has the effect of making retailers of fuel have to work harder for market share, and more aggressively discount to attract customers. The net effect is lower margins across all industry participants, as those who do not discount lose market share and the ability to drive earnings growth.
Caltex may surprise investors with a new growth strategy in coming months, but until then, the share price is likely to track sideways in the absence of any near-term catalysts.
