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Convenience store chain Casey's General (NASDAQ:CASY) has seen its share price take a small haircut after reporting third quarter results earlier this week. Revenue rose 5% year-over-year to $1.7 billion, falling a tad shy of consensus estimates. Earnings fell 7% year-over-year to $0.40 per share, falling well below consensus expectations.

Because of its large amount of retail fuel sales, revenue itself isn't the best metric to measure Casey's performance, but the firm provides plenty of other useful data points. Same-store gasoline volumes rose 0.6% at an average margin 13.8 cents-just short of the firm's targets of 1% and 14 cents, respectively. The margin was slightly ahead of last year's pace. The price of gas went up steadily during the quarter, so we're not surprised to see both consumption and margins go down. We think this trend could easily reverse itself with some pump relief in the coming months. Often times, consumers aren't privy to the absolute price of fuel (which was basically flat at Casey's at $3.15 this year vs. $3.16 last year) as much as the velocity of change-and the ascent was fairly rapid throughout the firm's third quarter. Management reflected this point in the conference call, saying:

"Same-store gallons sold through the 9 months were flat compared to the same period a year ago, and total gallons sold for the year, up 3.6% to 1.2 billion. For the 9-month mark, the average retail price was $3.38 per gallon compared to $3.41 last year. Average retail price of gasoline for the quarter was $3.15 a gallon compared to $3.16 1 year ago."

As is often the case, relative swings (compared to last week) can matter much more to the consumer. February was already a better month, with fuel sales excluding the extra day up 1.3%.

The Grocery and Other Merchandise segment was relatively weak, falling well short of its goals of 6.2% same-store sales growth and 32.7% average margins, posting 3.2% same-store sales growth and 31.7% average margins. The major culprit here was cigarette sales, which continue to be weak and weigh on margins, but management indicated that sales have started to stabilize. We're not too worried about this segment, especially since same-store sales rose 5.3% year-over-year excluding the impact of cigarettes. Unfortunately, with dollar stores getting into the space, we only see cigarettes becoming a more competitive item, and management admitted it doesn't really have an inclination to hold the line or prices or margins, saying:

"…we like to be matching our competition on key products within the cigarette category. And so you've got to evaluate what those key products are market by market to make sure that you are priced competitively. Because as I mentioned earlier, I mean, cigarettes arguably is the #2 destination item of most -- any convenience store, gasoline being the first. And so if we understand that, that is the reason that they're coming to our stores, we certainly don't want to give them any reason not to come to our stores."

We believe this segment remains a strong opportunity for Casey's, as it can introduce more SKUs to boost prices while marginally raising prices on existing goods without hurting demand.

Perhaps the largest opportunity for Casey's, Prepared Food and Fountain Beverages, continued its wonderful performance with total sales growing 15% year-over-year to $137 million. Same-store sales in the segment jumped 11.6%, while the average margin was 60.6%. Pizza is a huge seller, so an increase in cheese prices weighed heavily on margins, which were 80 basis points lower than a year ago. Nevertheless, the segment remains highly profitable and looks like an area that Casey's can continue to grow at a brisk pace going forward.

Much has been made about the possibility of Casey's becoming a REIT or creating an MLP structure, but we don't see any reason why the company should pursue such a strategy at this point. The firm is doing an excellent job of growing its store base 4%-6% a year via build-outs and acquisitions, and we would like to see the company continue its current strategy. While the firm carries a relatively large debt-load, we think the steady convenience store business will generate sufficient cash to cover interest payments.

Shares of Casey's currently trade near the low-end of our fair value range, and if we were to see a pullback below $52 and subsequent technical strength, we could be enticed to add the name to the portfolio of our Best Ideas Newsletter.

Source: Casey's General Is Almost Cheap