Is Casey's General Stores the Most Convenient for Your Portfolio?

Is Casey's General Stores the Most Convenient for Your Portfolio?

Casey's General Store is a quickly growing regional convenience store and gas station business based in the Midwest, but is it worth the premium pricing? The company is adding new locations to its nearly 2,000-strong store footprint and has delivered some impressive store-level sales figures for gasoline, groceries, and prepared food items, though overall top and bottom lines came in under analyst expectations. The convenience store business is compelling in that the fuel segment, while brutal on margins, gets people into the stores, where margins are high and product innovation is driving growth. Still, at almost 18 times earnings, this is a richly valued player in the space. What's an investor to do?

Gas, Slurpees, and pizza
Casey's third quarter generally sees weakness in gasoline sales, and while the just-ended quarter did show a relative weakness in average margin (just $0.14 per gallon), same-store gallons sold rose a healthy 3.8%. The story was much better across the company's other segments, with groceries growing store-level sales at 6.5% and prepared foods and fountain drinks up a mouthwatering 10.7%.

Margins on gasoline are always weak (for reference, a "strong" margin is around $0.17 per gallon), and the name of the game here is convenience-store margins. Groceries at these stores perform great, with a margin of more than 30%. The company is finding even more traction after installing additional coolers. Management's annual goal is 32.3% with same-store sales of 5%. Margins for prepared foods sat at slightly more than 60%, with an annual goal of 62%. Annual same-store sales are targeted at 9%.

Casey's is expanding via freshly built locations and acquired ones. It currently has 32 Stop-N-Go's contracted for acquisition during 2014, and is building 25 locations.

How does it stack up?
There's no denying the strength of Casey's' business at the moment, as well as going forward throughout 2014. With such strong same-store sales figures, the expanding store footprint looks like a great strategy for allocating capital and earning a solid ROIC.

At 18 times earnings, though, the stock is rich compared to some peers. Murphy USA is a slightly different business in that it keeps its locations within a couple miles of Wal-Mart's -- as a rule. The company sells unbranded gasoline at discounts (think $0.12-$0.13 per-gallon margins) to its branded brethren and makes its money, like Casey's, inside the stores. In its recent quarter, Murphy USA showed per-store nontobacco merchandise sales growth of more than 7%. Throughout 2014, management expects to grow its store count by about 40 locations.

It doesn't quite have the flashy store-level sales figures that Casey's does, but Murphy USA trades at around 11 times its forward earnings -- a substantial discount to Casey's. Both companies are growing organically and via new stores, albeit with different strategies of getting there. On an EV/EBITDA level, Murphy trades at just 6.16 times trailing EBITDA, while Casey's trades at 8.66 times.

Murphy offers better downside protection here, even if the growth isn't quite as attractive. In the words of Warren Buffett, the best way to make money is to not lose it. Casey's is a strong business with talented capital allocators at the helm, but it's not the best pick today.

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