Casey’s Knocks Earnings out of the Park (CASY)

I first came across Casey’s General Stores (CASY) in March of 2013. I was intrigued because they offered a cross between convenience store and grocery, and their then-1,700 stores were peppered throughout 14 states in the Midwest.

caseys-general-store-casy-stock-185I had come across similar privately held concepts in rural parts of other states, and what I like is that CASY stores made pizza and made-to-order sandwiches, and it offered lunch, dinner and just about everything you’d find in a convenience store.

At the time, I didn’t like how margins were slipping at CASY. Margins are thin enough in a business like this. Still, the concept intrigued, and convenience stores are always in need.

CASY stock is up more than 55% since then, and Casey’s has improved its situation markedly. The economy has improved enough that a niche play like CASY operates tends to see pretty rapid improvement. And the past quarter’s numbers for CASY were blockbuster.

CASY Stock Posts Great Numbers

Diluted earnings per share hit $1.05, almost doubling last year’s 54 cents. For the full year, EPS came in at $4.62, up more than 40% from last year’s $3.26. Each of its segments saw outstanding growth.

CASY wanted to see a mere 1% improvement in same-store fuel gallons sold, but instead blew that away with 3.5% improvement. CASY wanted 15.3 cent margins and came away 16.9 cents per gallon. The result was a total fuel sales increase of 9% to $1.8 billion. Gross profit from fuel alone came to $351 million.

My mouth was already watering, and I hadn’t even read on grocery and merchandise yet. In that arena, CASY set a pretty high bar for itself, aiming for 5.3% same store sales and 32.1% margins. How’d the company do? Same store sales rose an amazing 7.8% on 32.1% margins. Margins are stronger in this category, as it also generated $1.8 billion in sales but contributed $576 million in gross profit.

And it just keeps getting better.

Prepared food and beverages is the segment that provides the highest margins for CASY. The company wanted a very difficult metric here – same stores sales increase of 9.5% — numbers most retailers can only dream of. But quarterly same-store sales actually came in at 13.5%! The comapny also beat its 60% gross margin target by 90 basis points. Sales for the full year were $781 million, with gross profit of $466 million.

It’s pretty astonishing to see CASY deliver so strongly. It speaks to the fact that their stores are well-located, carry consumer staples and consumables that folks in rural areas aren’t going to find easily. And the company has nailed the right price points for convenience items.

How does all this play out on the bottom line? FY15 saw $7.77 billion in total sales and $180 million in net profit, for a net margin of only 2.3%. Now you understand what I mean about thin margins. That’s why having gross margins on food is so critical.

Best of all, the company did not engage in share buybacks, so that 42% EPS increase was all organic.

On the balance sheet, CASY stock has $49 million in cash and $838 million in debt, accruing interest at about 5% annually.

Bottom Line for CASY

Is CASY stock fairly valued? It’s hard to say because there are no real convenience store stocks out there. The past one was The Pantry, which Circle K bought for $1.7 billion, or 16x operating income. CASY stock had $479 million in operating income for FY15, and trades at 7x operating income. Both companies have similar balance sheets and free cash flow.

I think that Circle K overpaid for The Pantry, though. As it is, CASY stock trades at 20x earnings. If the growth we saw this year is sustainable at 20% or more, then I would buy here.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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