Try and Keep Up With Murphy USA

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Murphy USA Inc (NYSE:MUSA) is one of those rare companies that has been able to identify a particular niche, exploit the opportunity that exists within it, and successfully duplicate the process over and over again. That may sound simple enough, but you would be surprised how few companies have been able to successfully pull it off.

murphy usa-musa-stock-185Murphy USA operates over 1,250 convenience stations, with most of them adjacent to a Wal-Mart Stores, Inc. (NYSE:WMT) retail storefront. If you’ve ever visited a Wal-Mart in the central or southeastern portion of the U.S., then there’s a pretty good chance you spotted one of Murphy USA’s storefronts off in the corner of the lot or across the street.

Murphy USA’s reach allows it to serve 1.6 million customers daily in 23 states, stretching as far west as New Mexico and Colorado and as far east as Virginia.

Murphy USA originated as a subsidiary of parent firm, Murphy Oil Corporation (NYSE:MUR), the $9 billion global oil exploration and production conglomerate. Murphy Oil was founded in Louisiana and dates back to 1950 with operations throughout the U.S., Canada, Malaysia, the United Kingdom and the Republic of Congo.

Murphy Oil’s revenues were split between oil production and the sale of refined products until it spun off the latter into Murphy USA via an initial public offering in 2013.

Even before the IPO, the retail division was placed in the hands of current chief executive Andrew Clyde. He previously spent 20 years at the big consulting firm Booz & Company Inc., working with oil and gas related organizations on strategy.

Unlike the typical gas station or corner convenience store that you may frequent to refuel your car, Murphy USA stores are 100% company-operated, and 90% are company-owned.  This provides Murphy USA with a level of operating efficiency and store consistency that peers have been unable to match. The relationship with Wal-Mart dates back to 1996, when the two companies began an initial 20-store agreement to test the strategy.

The first retail site was opened in Chattanooga, Tennessee, in 1997, and a year later, Murphy signed a master agreement with Wal-Mart for 12 states in the southeast and southwest. Fast forward to 2014, and over 1,000 stores are on or adjacent to Wal-Marts. The relationship continues to blossom, with the two signing a new 200-site agreement a couple of years ago.

To say Wal-Mart and Murphy USA passed the initial test with flying colors would be an understatement. MUSA ended 2014 by tripling its net income to $98.3 million from the previous year while doubling retail fuel margins. A low fuel price environment certainly helped, although gross margins for merchandise also improved significantly.

There are currently nearly 4,000 Wal-Mart stores in the U.S., and while all of these would not represent feasible potential site locations, Murphy USA has stated that there are 1,200 supercenters in their core geographic footprint that do meet the qualifications. That expansion effort would double the number of stores, and that’s without any meaningful growth to the west coast factored in.

Murphy USA opened 14 new stores in the most recent quarter alone, adding up to a total of 60 in 2014. So far this year Murphy USA has opened two new stores, with six more currently under construction. Compare that to the 39 new retail locations opened in 2013, and you can see that MUSA is continuing to accelerate its growth plan.

The MUSA retail sites fall into two categories: kiosk and small format. Over 80% of the sites are kiosks, ranging in size from 112 sq ft up to 270 square feet, while the small format stores can be as big as 1,200 square feet.

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Murphy USA’s fuel strategy is based on high volumes sold at prices at or below those of its nearby competitors. If that strategy sounds familiar, it’s because it closely resembles what partner Wal-Mart emphasizes as a discount retailer. No wonder MUSA and WMT work well together.

As a result, MUSA’s revenue breakdown of petroleum (86%), merchandise (12%), ethanol (2%) is decidedly focused on its retail fuel sales. This strategy has been successful, largely because of its operating efficiency and the way in which it sources its fuel supply.

Falling oil prices have been a recent boon to Murphy USA’s operating margins, but it maintains a sophisticated Product Supply & Wholesale division to take advantage of the market volatility in fuel prices. This segment looks to optimize the mix of supply sources, contracts and distribution systems to capture additional value.

An example of this would be sourcing fuel from distant geographic locations if there is significant price advantage versus local sources.  Even with additional transportation costs, MUSA’s scale advantages often help it to still undercut local competition.

In addition to the retail operations, MUSA also has a small ethanol segment, consisting of an production plant in Texas. Once Murphy USA was spun off, the management team opted to consolidate and focus on its core retail operations.

As a result, Murphy USA sold its largest ethanol plant in Hankinson, North Dakota, late last year, with just the Texas plant remaining. No decision has been announced, but it’s reasonable to believe MUSA will sell its remaining ethanol production assets once an attractive opportunity presents itself.

Since being spun off, Murphy USA has increased its growth initiatives, and the larger its footprint, the better its future pricing power. Operating income grew by 56% in 2014, and yet MUSA shares are currently trading at a price-to-earnings multiple of 19.2 times. MUSA shares are up over 90% since going public, and with a clear growth strategy in place, there’s no signs of Murphy USA slowing down.

Research: James Mack


Article printed from InvestorPlace Media, https://investorplace.com/2015/02/murphy-usa-musa-murphy-oil-walmart-wmt/.

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