You may have noticed that your wallet is getting a bit fatter these days. Sadly, taxes haven’t gone down, but at least the cost of your morning commute has.
Gasoline prices have fallen by the wayside lately and in some areas they’ve recently hit lows not seen since the end of the Great Recession — four years ago.
According to AAA, the average gasoline price for regular unleaded across the U.S. is now $3.51 cents per gallon. That’s about 3 cents cheaper than a week ago and nearly 12 cents cheaper compared to the same week last year. What’s more, some areas are experiencing gasoline prices as low as $3.20 per gallon.
And according to the automobile club, we might be in for even lower prices down the road. AAA even believes that we could see sub-$3 per prices by the end of the year. That’s a sharp reversal from just a few months ago, when prices were steadily rising.
While that’s awesome news for our wallets and gas tanks, it does have several investing implications for portfolios. And one group of energy stocks have the ability to profit handsomely from the lower gas prices.
Lower Prices Equal Bigger Margins For These Energy Stocks
The reason for low gas prices is simple: We have an abundance of gasoline supplies.
Refineries are running at full tilt as fracking continues to uncover a virtual ocean of oil from the nation’s various shale formations. That glut of cheap oil is translating into cheaper and cheaper gasoline. At the same time, Americans are using less of it. From higher fuel efficiency standards on automobiles and more businesses allowing telecommuting to more Americans abandoning car ownership altogether, we’re simply using less gas. The result is a declining price environment for petrol.
As long as oil costs remain stable and refinery production continues to remain strong, gas prices should continue on their trajectory downwards for the rest of year. That’s not exactly “super” news for refiners like Valero (VLO) or domestic-focused E&P firms like EOG (EOG). But it’s great news for the owners and operators of service stations and convenience stores.
While it may sound counter-intuitive, higher prices for gasoline actually hurt the operators of service stations. That’s because margins per gallon are very thin — around 3 to 15 cents — and as the cost of buying that fuel from refiners goes up, service station operators actually make less money per gallon. That profit margin drifts into loss territory when you add in the high cost of credit card processing fees.
For example, if it costs $50 to fill up and the credit card fee is the standard 1% of the sale price plus 10 cents per transaction, it costs the service owner 60 cents. But if the price of gas goes up and it now costs $60 for the same amount of gas, the fee is now 70 cents. When gas prices peaked in 2008, the Petroleum Marketers Association saw a mass wave of smaller mom & pop service stations go under from the strain of these fees.
Lower gasoline prices actually give the service station operators some room to run, meaning they’ll be at the top of that profit-per-gallon range. In addition, lower gasoline prices provide an extra boost to the convenience store owners — more cash for consumers to play with. Many service stations will lean on their food, soda and cigarette businesses in order to boost profits. By spending less on a tank of gas, consumers will have a few more dollars to go buy a cup of coffee or Snickers form inside the shop, boosting profits further.
So, which stocks have the most to gain from lower gas prices?
Here are our picks for the three convenience stores benefiting most from gas prices.
CST Brands (CST)
Spun off from Refiner Valero back in 2103, CST Brands (CST) Brands is the second-largest convenience store chain operating in the nation, with more than 1,880 convenience and retail stores, including 1,032 company-operated fuel and convenience stores in the U.S. and 848 retail sites in Canada. That size and scope has given CST some pretty nice profitability over the last few years under VLO’s umbrella.
However, recent high gas prices have crimped earnings at CST. Most recently, the firm missed earnings estimates by about 5 cents per share. Lower gas prices could change that as will recent improvements in cost controls and moves to sell a greater mix of higher-margin prepared foods. Already, CST saw a 19% jump in its margins due to falling gas prices. So it’s no wonder why some analysts have aggressive price targets of $48 per share — about 45% higher than what CST stock is going for today.
Murphy USA (MUSA)
Like CST, MUSA owns the vast majority of its stores. That fact has helped it realize average monthly operating costs that are 44% lower than many of its peers. The location of those stores are also a big win for Murphy: At the end of 2013, MUSA had nearly 1,100 stores located close to Walmart (WMT) stores.
A recent deal will allow to MUSA to build an additional 200 stores outside additional WMT locations. That kind of foot traffic along with already low costs will make MUSA a huge winner as gas prices drop.
Casey’s General Stores (CASY)
Small-cap Casey’s General Stores (CASY) could be the biggest winner as gas prices fall. The smaller firm operates 1800 stores in 14 Midwestern states. The kicker is that the vast majority of its nearly $8 billion in sales came from gasoline. Lower gas prices can provide enough of a margin boost for CASY to incrementally boost its earnings. CASY already saw a 21% jump in earnings last quarter and realized margins of 16.8% per gallon over the previous time a year ago.
And like the other two energy stocks on this list, CASY is moving into higher-margin prepared food to boost profits even further. For investors, the small-cap and sector leading 1.2% dividend could be the best play on the lower gasoline prices.
The Bottom Line: Lower gas prices are a godsend for the convenience store operators. The trio of CST, MUSA and CASY should all profit handsomely in the new environment.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.