Casey's General Store: Buy the Best in Class

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 |  Includes: ANCUF, CASY, PTRY, SUSS
by: Consumer Contrarian
Disappointing results in the January quarter have shaved nearly 15% off Casey’s (NASDAQ:CASY) stock value, creating a buying opportunity for this best-in class C-store operator.
Investment Thesis
Comparable sales improvement continuing in the low- to mid-single digits, helped by investments in the most profitable growth categories, should result in a nearly 20% rise in overall operating profits in FY 2012 (April '12). Meanwhile, I expect sales growth from low-margin products (i.e., gas, tobacco) to slow to normalized levels, after past market share gains allow renewed focus on profitability. (Please see table below.)
F09
F10
F11E
F 12E
Comparable sales (ex fuel)
6.7%
3.5%
5.4%
3.5%
Grocery & Other
5.9%
3.3%
5.0%
3.0%
Prepared Foods
9.1%
4.2%
6.7%
5.0%
Gas Gallons
1.0%
-0.1%
3.0%
1.0%
Click to enlarge
Even after buying back a quarter of its shares and sharply ramping up its dividend in the current FY, CASY can easily support the 4%-6% yearly unit growth it targets. Stubbornly high gas prices are creating unique M&A opportunities, and the company’s strong balance sheet (net debt 2x LTM EBITDA) and solid free cash flows put it in position to exploit these immediately accretive, tuck-in type deals.
Mix Shift Supports Overall Margin Growth
For FY 2012, I anticipate the operating margin to rise 30 bps from the 3.8% I forecast for the current fiscal year, ending April. This assumes gross margin comparisons for each of the major categories is about flat (see table below), and that solid comparable growth in high-margin, in-store categories (grocery, prepared foods) provide nearly half of the margin lift.
F09
F10
F 11E
F12E
Gross margin
15.4%
17.1%
16.1%
16.3%
Gasoline (ex credit card fees)
4.8%
5.6%
5.4%
5.4%
Grocery & other
33.6%
33.6%
32.1%
32.2%
Prepared food & fountain
61.4%
63.8%
63.0%
62.8%
Click to enlarge
Tobacco Key to More Stable Grocery
The tobacco category accounts for nearly 30% of in-store sales as seen in the table below, and generates less than a 15% gross margin, based on my estimates. The negative impact on merchandise margins from trade-down and promotional cigarrette pricing has weighed on grocery profitability for the past 12-18 months, accelerating in the current fiscal year.
CASY
ATD
PTRY
SUSS
Tobacco % of in-store sales
29%
42%
39%
23%
Per store fuel gallons
854
1,199
1,255
1,407
Click to enlarge
With a leading C-store share in the majority of its key markets, CASY is a tobacco price leader. Continued strong comparable sales data for grocery to start FQ4 (Feb +6.8%) imply to me continued attractive pricing in tobacco to close the current fiscal year. But as it enters the key summer selling season – having taken considerable share from rivals – I expect the company to re-prioritize grocery margins over sales growth. Meanwhile, sales of prepared foods and gas – Casey’s two other “destination” items – will continue to adequately drive traffic, without undue discounting.
Compared to the tobacco category, Casey's prepared food competes less on price than on quality. The company's recent increase in coffee prices, and a scheduled hike for most other prepared items (including pizza) should ensure steadier margins but, more importantly, take pressure off of tobacco to build traffic. Meanwhile the company has built considerable cushion to become less promotional on gasoline sales, which at > +3% in comparable gallons and 15 cts gross margin per gallon, remain well above targets (of 1% and 13.5 cts).
Owned Real Estate
I believe the company’s property and equipment is undervalued, based partly on what I view as a conservative (i.e., rapid) depreciation schedule. Annual D&A expense on property and equipment suggests an average useful life of only about 10 years. Meanwhile, my $50 million estimate for depreciation of machinery and equipment also implies a depreciable life at the lower end of its prescribed range of 5 - 30 years.
Comparison to comparable recent acquisitions also point to a conservatively valued estate. During the first nine months of the current fiscal year, Casey’s paid $101 million for 74 stores (including 44 Kabredlo’s). Of this total purchase price, $66 million was applied to tangible assets, before inventories, implying $890k per store. Applying this same value toward Casey’s roughly 1,600 owned store base – which have superior profit characteristics – implies $1.42 billion in property value, a 23% premium to CASY’s Q3 property book value, which in turn, is well below the 40% in goodwill paid for these year-to-date transactions.
Industry Consolidator
The gas and convenience store industry is highly fragmented, with more than two-thirds of the stores owned by companies operating 10 or fewer stores. Record high gas prices ($3.60/gallon national avg. recently), are adversely impacting these mom and pop competitors, making it cheaper to buy than to build.
Steady cash flows and relatively modest debt levels (Net debt 2x EBITDA) favorably position CASY to take advantage of this window. The company has a strong track record in M&A, fully integrating acquisitions in just a few months. Most of the deals it considers are well-run, in-market competitors, allowing it to leverage its distribution network and enhance pricing power.
I estimate most recent deals are being done at around 5x trailing EBITDA. Even without significant improvements, the favorable pricing environment, on generally trough recent cash flow levels, helps make today’s purchases accretive in the first year. In recent deals, though, CASY is investing as much as a third of a store’s original purchase price in improvements, especially within prepared foods. By year two or three, as the new unit matures, cash flows will have doubled from the year of purchase.
Acquisition Candidate?
After two hostile offers that were spurned, it seems unlikely Couche-Tard (OTCPK:ANCUF) would return with another buyout offer for Casey’s. And although the company was close to recommending a revised $43 offer from 7-Eleven (Seven and I) last fall, that level would likely be the starting point for any further discussion with the country’s largest C-store operator. Other strategic buyers would likely be attracted to the company’s wholesale and distribution businesses, and its real estate holdings offer value to financial buyers, especially private equity.
Warm Weather Returns
In the 11 years beginning in 2000, CASY’s six-month returns - measured from the start of May through the following October - have averaged 13%, with just one down period (‘02). Relative to the S&P 500, with an average decline of 2% over the same spans, CASY has outperformed (by a wide margin) every year except one (2009), and then only marginally (<50 bp’s). Finally, its outperformance in bear markets (2000-2002, 2008) averaged a stellar 25%. (Please see table below.)
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
April end
11.69
12.06
13.02
12.95
16.56
16.88
21.39
25.15
22.13
26.61
38.63
Oct end
12.5
12.45
11.71
15.43
17.8
21.57
24.27
28.5
30.2
31.53
41.46
CASY
7%
3%
-10%
19%
7%
28%
13%
13%
36%
18%
7%
vs S&P 500
9%
18%
8%
5%
6%
23%
8%
9%
67%
0%
9%
Click to enlarge
Valuation and Underlying Assumptions
I value CASY at $48, based on comparative multiples, in which I assign an EV/EBITDA and PE multiples of 7.4x and 14.4x. These assigned multiples are above past averages, reflecting the impact on estimated earnings from record high prices for gas – 70% of revenues.
EV/EBITDA
P/E
11E
10A/E
09
08
11E
10A/E
09
08
Casey's General Store
6.2x
7.6x
6.2x
5.4x
11.4x
12.8x
13.9x
13.5x
Couche-Tard
5.9x
6.9x
6.5x
5.6x
10.5x
12.2x
12.6x
10.9x
The Pantry (NASDAQ:PTRY)
5.4x
6.1x
4.7x
6.3x
16.3x
31.1x
5.6x
16.7x
Susser (NYSE:SUSS)
4.8x
5.5x
6.3x
5.8x
nmf
nmf
nmf
13.6x
Click to enlarge
*For comparison purposes FY11 (April) for CASY and ATD are listed above as ’10E.
Versus peers, the multiples I assign CASY represent typical premiums that the company has earned through consistently superior growth and profitability (as shown in the tables below). I consider the company's margins a sustainable advantage thanks to its emphasis on prepared offerings, relative market shares in served markets, store ownership, and lower proportion of gas to overall sales.
CASY’s track record of growth, in comparable sales and store count, is superior as well. Moreover, competitors The Pantry (net debt to EBITDA of 4.3x) and Susser (3.4x) lack the balance sheet to reasonably support future store expansion. And although Couche-Tard has a strong balance sheet, its sheer size precludes it from effectively capturing the mid-single digit unit growth opportunities that Casey’s targets.
Merchandise SSS
Units
EBIT Margin
11E
10A/E
09
08
11E
10A/E
09
08
11E
10A/E
09
08
CASY
3.5%
5.4%
3.5%
6.7%
1,718
1,636
1,531
1,477
4.1%
3.8%
4.2%
3.2%
ATD
3.3%
4.5%
2.9%
0.6%
5,872
5,757
5,878
5,443
3.2%
3.0%
2.7%
2.6%
PTRY
1.5%
5.6%
0.0%
1.7%
1,698
1,638
1,673
1,653
1.4%
1.6%
2.7%
1.5%
SUSS
3.0%
4.0%
3.3%
6.6%
526
526
525
512
2.0%
1.9%
1.3%
1.6%
Click to enlarge
Business Summary
Casey’s is one of the largest independent gas and C-store operators in the country. Its 1,618 stores are located in 10 Midwestern states, of which Illinois, Iowa, Missouri and Nebraska account for almost 90% of the system. About 60% of its total stores are located in communities of 5,000 people or fewer. Its main banners include Casey’s General Store, HandiMart and Just Diesel. Stores are typically about 2,800 square feet, and carry a broad selection of food, tobacco products, other non-food items, and freshly prepared foods such as pizza, donuts and sandwiches. All stores offer gasoline for sale on a self-service basis.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.