An Examination Of Casey's General Stores

| About: Casey's General (CASY)

Summary

Casey's General Store appears to have qualities that make it an investment candidate.

Casey's General Store is undervalued when compared to its estimated reproduction cost of its assets.

Casey's General Store is overvalued/fairly-valued when compared to its Earnings Power Value.

Why I was attracted to the Stock:

I first took notice of Casey's General Stores (NASDAQ:CASY) when I moved to a small town. It was about 11pm and there was a line that nearly wrapped around the store. While standing in line for what seemed an eternity certain questions dawned on me "Why are there so many people buying food at a gas station this late? Did they really have to come here? This is a town of 6,000 are they all shopping here right now?"

Of course the entire town wasn't inside the gas station. The clerk, when I asked, said it was typical because the night shift at the train yard had limited options on what they could eat. I instantly thought that sounded like a quasi-monopoly. So I decided to learn more.

After looking into it, a few things stood out which make the case that CASY is a potential investment. First, CASY is boring and obscure. Not a lot of people are going to get hyped up about a gas station chain that only operates in a few Mid-Western states (mainly Iowa, Illinois and Missouri). In addition, CASY limits itself to towns with small population sizes, 57% of stores are located in areas with fewer than 5,000 people. This however has 2 effects; one is that CASY may not attract a lot of interest from the broad investment community, thus keep the company under the radar. However, the stock is on Goldman Sachs' conviction buy list which may make it well known enough to be priced efficiently. The other effect brings me to my second point. CASY may have regional dominance and contain a sustainable competitive advantage. The C-store industry is highly competitive and there are no barriers to entry, from what I can tell. Because of that many may just throw this company out. However, CASY operates in small towns and sticks to regions that it can do well in. So it may be entrenched, making it very difficult and costly to challenge them in these markets. My interaction with the store at 11pm was not uncommon; these hungry men did not have many choices on where they could get something to eat which made CASY the default option. To be honest, it's not a bad choice; the pre-pared food is very good. Those products are the third reason CASY may warrant a closer look. The Company is to focusing more on prepared foods that will fetch higher margins and will positively impact earnings. Selling higher margin items at an increased volume will offset the fall in earnings if sales were to stagnate or fall.

So with that, we will analyze CASY's reproduction cost of its assets and its EPV with and without growth to see if the stock is a good investment. The information used in this article is from the company's annual report issued in April of this year. All of the tables and figures have calculated from this resource.

Asset Value:

The most reliable information that we have is information on the company's assets from the balance sheet. Since the industry is relatively stable and is not in serious decline we will value the company using the reproduction costs of its assets. To do this we will move down the balance sheet and see how CASY's book value of its assets are compared to its reproduction cost. We feel that this is important because we are interested in how much it would cost a new entrant to replicate CASY's assets which would be equated to the company's intrinsic value.

CASY Balance Sheet

FY 16

Recreation

Current Assets

Cash

75775

75775

Receivables

27701

27701

Inventories

204988

263420

Prepaid

3008

3008

Income Tax

14413

14413

Total Current

325885

384317

Land

593043

593043

Buildings

1279258

1279258

Equipment

1704379

1704379

Leasehold Interest

16044

16044

Less Acc. Dep.

-1340249

0

Net PPE

2252475

3592724

Other

19222

19222

Goodwill

128566

128566

"Hidden Assets"

0

3281135

Total Assets

2726148

7405964

Current Liabilities

Current LTD

15375

15375

Payable

241207

241207

Accrued

Wage

32026

0

Property Tax

24091

0

Insurance

35535

0

Other

39337

0

Total Current

387571

256582

LT Debt

822869

822869

Deferred Tax

394934

0

Deferred Comp

17813

0

Other LT Liability

19498

19498

Total Liability

1642685

1098949

Click to enlarge

We only changed a few items on the balance sheet. Current assets have been basically left unchanged. The only change made was to inventories. According to the annual report the company had inventories as such:

Fiscal 2016

Fuel

$57,840

Merchandise

$147,148

Total Inventory

$ 204,988

Click to enlarge

They also said "Inventories, which consist of merchandise and fuel, are stated at the lower of cost or market. For fuel, cost is determined through the use of the first-in, first-out (FIFO) method. For merchandise inventories, cost is determined through the use of the last-in, first-out (LIFO) method." And they added "The excess of current cost over the stated LIFO value was $58,432 and $53,428 at April 30, 2016 and 2015, respectively." Because of that, we simply added the excess of LIFO cost back to the inventory assuming a new entrant had spend at least this to enter the market.

Moving to the fixed assets we assumed only two changes. The first is the addition of accumulated depreciation to the asset value. Since we have limited knowledge of the company's portfolio of land, buildings, and the break down of a gas station's assets therein we decided to leave the asset value at the original cost and remove the accumulated depreciation from the equation. We are making the assumption that a new company would have to pay a similar amount. A more in depth article about this subject was been written on this website and is available. The second change was to add a hidden asset. We feel that it would take a competitor time and money to build a loyal customer and to replicate CASY's distribution and logistical stronghold. We represented this by taking 50%, or 6 months, of the annual cost of goods sold and operating expenses, which for the year was $5,508,465 and $1,053,805 respectively.

The last change we made was to the liability side of the balance sheet. We felt that some of these liabilities arose from the companies past circumstances and were not necessary for a new entrant to replicate. Because of this logic we simply did not include them into the calculation.

That then leaves us with the following results when using a 39,422,199-share count:

FY16

Recreation

Assets/Share

$69.15

$187.86

Liabilities/Share

$41.67

$27.88

Book Value/Share

$27.48

$159.99

Click to enlarge

Based on this information CASY is undervalued and presents the investor with a 30% margin of safety when the stock trades around $123. Note that if one were to take a less optimistic view, such as changing the hidden asset value to 25% of operating expense and COGS, that value would fall considerably, in that case around $118 per share had would therefore have no margin of safety.

EPV:

A less reliable but widely used valuation technique is to analyze the company's EPV. Using the figures from the annual report, we will make adjustments to strip out any growth in our Free Cash Flow (FCF) model. We do this because it simplifies the model. There is no way we are going to make the all correct assumptions that is required for a true discounted FCF model. When we mix good current information with bad assumptions we get poor results. The method is already fragile enough. The first step is to find the after tax EBIT or Adjusted Net Income.

Sales

$7,576,519

EBIT Margin

6%

EBIT

$454,591

Tax

35%

Net Income

$295,484

Click to enlarge

There were a few assumptions made for this first part. For the sales, we took an average of the past 3 years. Recently, sales have been falling and may continue to do so, possibly due to the price of fuel. We are attempting to normalize sales and not make any macro-economic assumptions about what those prices may or may not do. As for the EBIT margin, 2016 was the highest that we had sampled for the company at 5.4%. If our instincts are correct, this will continue to rise as the company focuses on higher margin goods. The tax rate was simply a rounded average of prior years found in the reports.

To arrive at FCF, we will simply add back maintenance depreciation and capital expenditures (CAPEX). Since we are assuming a no growth scenario we have altered these two figures to represent what we feel is the true CAPEX and depreciation cost needed to maintain operational cash flow as is. We took the average CAPEX to sales ratio over the past 3 years and multiplied that by the change in sales year over year. This represented the growth in CAPEX to support growth in sales; we subtracted this amount from the 2016 total, which gave us the amount that we used in the model. We did the same adjustment for depreciation only using deprecation to CAPEX. Giving us the results shown here, using the same share count as before:

Depreciation

$157,101

Cap Ex

$207,364

FCF

$245,221

FCF/Share

$6.22

Click to enlarge

The last piece of the puzzle is to find an appropriate discount rate. We opted to use our own Weighted Average cost of Capital (WACC). CASY provided adequate information in the annual statement for us to assume a cost of debt. We calculated the weight of each type of debt and multiplied that by the interest rate that CASY pays to come up with a cost of debt of 4.89%. As for the cost of equity we simply chose 10% instead of using the debatable and still arbitrary Capital Asset Pricing Model. From our findings, supported by Morningstar, the company is comprised of around 43% debt and 57% equity. Using this information, our WACC was 7.8%.

Since we stripped out the growth aspects of the company we will merely divide the FCF by the WACC, which will give us the value of the cash flow in perpetuity, which is $79.82. If CASY does not grow at all, shares as they are standing today would be overvalued. Of course that prediction, more than likely, is not going to be very accurate. As stated in the annual report the company has plans to build and/or acquire anywhere from 77 to 116 new stores, replace 35 and remodel 100. The company fell short of their previous year's goal, so if we took the low end of this projection on a basis of 1,931 stores it would imply a 3-4% growth in store count. If we assumed the company would grow its FCF forever at the low end of this we would have a value of $129.77. This still implies that the company at current stock prices is fairly valued.

Conclusion:

There a few ways to look a the scenario. If we look at the asset value CASY seems to be undervalued. Turning to the EPV we get a different story. If the company has no growth or doesn't have a competitive advantage the shares are overvalued. If we throw growth into the mix and CASY has a moat the company seems to be fairly valued. Unless the market provides us with an opportunity, for example when CASY reported less than stellar quarterly numbers, I feel that investors that currently do not have a position should look elsewhere for opportunity, those that do should hold tight.

Disclosure: I am/we are long CASY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.