The spin-off of Valero Energy Corporation's (VLO) retail business, CST Brands, is complete. At 12:01 am on May 1, 2013 shareholders who held Valero stock on April 19, 2013 received one share of the newly created company for each 9 shares of Valero stock. A total of 80% of CST Brands has been distributed, and Valero holds the remaining 20%. CST Brands begins trading under the symbol (CST) on May 2, 2013. It was already trading on a when-issued basis, and on Wednesday, May 1st, it was trading between $30.15 and $31.49 midday. 'When-issued' trades can be made but don't settle until the stock is actually issued.
CST Brands has slightly over 1,000 retail convenient store locations throughout nine states in the U. S., plus 848 retail stores in six Canadian provinces. They operate under the names Corner Store and Depanneur du Coin gas and convenience stores. In addition, the new company will supply products to 4,000 independently owned locations. CST Brands recorded $13.1 billion in revenue in 2012. According to Standard and Poors, Valero's retail business operating income in 2012 was $348 million.
CST Brands will be Added to the S&P Midcap 400 Index Sub Industry Automotive Retail:
S&P MIDCAP 400 INDEX - May 1, 2013
GICS ECONOMIC SECTOR
Northern Oil & Gas
Oil & Gas Exploration & Production
According to PR Newswire, CST Brands has been added to the S&P Midcap 400 Index. S&P characterized CST Brands this way:
"CST Brands is an independent retailer of motor fuels and convenience merchandise. Headquartered in San Antonio, TX, the company will be added to the S&P MidCap 400 GICS Automotive Retail Sub-Industry index."
CST Brands Has Scale…Plus it's a Real Estate Play
According to the Investopedia website, CST Brands will be the second largest independent retailer of fuel and convenience merchandise in North America with nearly 1,900 locations. Approximately 60% of its U.S. business is in Texas, which just happens to have one of the stronger economies in the U.S. More importantly, 60% of its retail sites are owned rather than leased, making it a real estate play as well.
The retail convenience store format--or C-Store--as it is known in the business, is a highly fragmented space made up of a few large private companies such as 7-Eleven Inc, Kwik Trip, and Quick Trip. Casey's General Store (CASY) is a smaller $6.6 billion in revenue ($2.1 billion market cap) publicly traded enterprise, but it really isn't a direct competitor as it operates 1,700 stores in the Midwest, primarily in the geographic area of Iowa, Illinois and Missouri.
CST Brands--Keep it or Sell it?
If you are a Valero shareholder who received CST Brands shares in the spin-off, my suggestion would be to hold on to them. Previous successful examples (which are not exactly apples-to-apples comparisons) illustrate the potential for the spin off to do well. Conoco Phillips (COP) spun-off its refinery and marketing assets in May 2012 creating Phillips 66 (PSX) as an independent company. PSX is up 90% over the past 52 weeks. Marathon Oil (MRO) spun-off its refining and marketing division in 2011 creating Marathon Petroleum (MPC). MPC has surged 88% over the past 52 weeks. Both the Phillips 66 and Marathon Petroleum stock price increases need to be evaluated against a 12.95% rise in the S&P 500 over the same time period.
No one can predict the future, but CST Brands may very well grow over the long term.This is likely as they have a significant retail footprint and C-Stores generally are able to maximize margins because they sell more high-profit products than just gasoline. In addition, this is a business that is already established, generating more than $13 billion in revenue last year. The locations are already established as the 'Corner Store' and many of the street corners (60%) are owned, not leased. I am long Valero and now I will be long CST Brands.
Additional disclosure: I am not a professional investment advisor, just an individual handling his own account with his own money. You should do your own due diligence before investing your own funds.