by Lawrence Meyers | September 16, 2013 10:29 am
It’s been a mighty weird year for Casey’s General Stores (CASY). The company has had some tough quarters, but just when things are looking bleak, the team got some runners on base and drove a few home.
Casey’s has a concept I really like, in that it has 1,700 stores across 14 states, selling all manner of convenience-store products. The company is a rural operation at its core, with some 60% of stores in areas with fewer than 5,000 residents. The result is that it doesn’t have a lot of competition as it might if it were ensconced in urban areas, so it becomes part of a quasi-oligopoly.
As a convenience store, it doesn’t have direct competition from Dollar Tree (DLTR) or Family Dollar (FDO) because these dollar stores aren’t exclusively focused on food (and they have no gasoline or cigarette sales), and they’re targeted at the folks who are trying to save money over convenience, not vice versa. The convenience angle is another reason why Walmart (WMT) and Costco (COST) aren’t competitors, since those behemoths are about a total shopping experience.
The company had a lot of work to do after disappointing investors in Q4. Revenues missed expectations, EPS came in 7% lower year-over-year, and operating margins fell, as did net margins. But its fiscal first quarter, the company slugged some solid hits into the outfield. Revenue exploded 13%, leading to a 43% increase in EPS.
But what was driving those increases?
The company began a partnership with Hy-Vee Stores, in which customers who purchase certain items at the stores can get a fuel discount credit at Casey’s. The company stated it has an annual goal of increasing same-store gas sales 1.5%. This partnership contributed to a 3.2% comp increase, and average margin of 22 cents per gallon — well above the company’s target of 15 cents.
Grocery and other merchandise experienced strong growth, with comps up 6.1% vs. a 5% target, and average margin of 32.3% vs. a 32.7% target. Cigarette price reductions held back an even greater increase.
We all like prepared food and drink when hunger hits on the road. Comps lifted an astonishing 11.9% vs. a 9% target, and margins hit 62% vs. the 61.8% target. Category sales were up 16.5% total.
All these increases did come at the expense of increased operating costs (14%), as the company marketed its new initiatives and expanded to 24 hours in some locations.
Casey’s doesn’t seem to think the overall economic environment is going to impact their performance, as the company intends to build or acquire 75 to 100 stores this year. It’s a strong vote of confidence that its particular niche is still a viable option for many Americans. This is also a good sign overall for the economy, in that folks in these communities still value convenience over price enough to push sales as much as they did.
There are tricks to this business. The company relies on commodities like cheese, the cost per pound of which increased 11% over the year, in order to make pizzas. Cigarette prices can fluctuate, as can gasoline prices.
The company sits on $190 million in cash and manageable debt of $819 million. I don’t like the $150 million increase in debt, but the company generated $138 million in operating cash flow this quarter, and only blew through $74 million in capex. Still, that capex will increase as it opens stores. So it’ll be a race between maintaining cash flow to service debt. As long as numbers hit company targets, it should be fine.
Alas, Casey’s stock remains much too expensive to purchase. Analysts see five-year growth at 10.4% annually, and on FY14 estimates of $3.67 with a 1.2% yield, that gives us a fair value of around $43. However, the stock currently trades at $71.
I’m not paying that much, even for a seat in the outfield bleachers.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets @ichabodscranium.
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