In today’s energy business the best place to be is at the end of the line, at the gas pump. Most of the best operators are privately held. Wawa, QuikTrip, Sheetz, and Buccee’s are all family businesses. Refiner-owned stores, like those of Valero Energy (NYSE:VLO) and Marathon Petroleum (NYSE:MPC), are adjuncts to the main business of gas. The best operators are in the convenience store business. They have big stores with lots of pumps. Store brands raise margins. The best publicly-traded operator is Casey’s General Store (NASDAQ:CASY), a familiar name in the upper Midwest.
Casey’s opened for trade Dec. 15 at about $173 per share. That’s a market cap of $6.4 billion on what should be $8.5 billion to $9 billion in sales for the year ending in April. The final figure depends on when the pandemic ebbs.
Thirsty for Acquisitions
Casey’s has become hungrier for acquisitions under new CEO Darren Rabelez. He was president of Dine Brands Global (NYSE:DIN) IHOP chain before taking the Casey’s hot seat last year. He was also once COO of Seven and I Holding’s (OTCMKTS:SVNDF) 7-Eleven chain.
Before Rabelez joined, Casey’s made a run at Kroger’s (NYSE:KR) gas stations, losing out to Britain’s EG Group. The company moved under pressure to expand from private equity and investor Joshua Schechter, who is also on the board of Bed, Bath & Beyond (NASDAQ:BBBY).
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Rabelez finally delivered some of that growth in November. Casey’s bought Buchanan Energy, which operates a chain called Bucky’s, for $580 million. About $80 million of that is “tax benefits,” the rest cash. The deal will increase Casey’s footprint to 2,300 stores.
The Food Business
While Rabelez started his career with Exxon Mobil (NYSE:XOM), he learned that the big opportunity in gas stations is in food, specifically prepared food. At Casey’s Nov. 9 earnings call, he noted that 31% of Casey’s merchandise mix is pre-made food, like pizza. Bucky’s stores that are remodeled to handle more of this food will be re-branded to Casey’s, he said.
Branding is another Rabelez initiative. Casey’s is a 52-year-old company based in Ankeny, Iowa, a Des Moines suburb. Its business is centered in farm country. But Rabelez is rebranding Casey’s General Store as just Casey’s. The new brand comes with an ad campaign.
Growth Is Coming
Casey’s stock was up by more than 20% on the year and beating the averages before the latest lockdowns. It’s now up just 9% on the year.
But the numbers reported for the October quarter beat estimates for the third straight time. The company earned $112 million, $3 per share, on revenue of $2.2 billion. It hiked the dividend 2 cents to 34 cents per share.
Rabelez credited grocery sales and higher margins on gasoline for the second quarter results. Many stores are in rural areas where they can be the nearest grocery. Prepared food should pick up when interstate travel comes back after the pandemic.
The Bottom Line
Compared to the general market, Casey’s stock is cheap, at under 20 times earnings. The renewed pandemic made it even cheaper.
Unlike many players in the energy game, Casey’s is profitable. Its rural footprint means it’s less likely than other chains to be disrupted by electric vehicles. Analysts have Casey’s stock as a moderate buy, with a price target of $215, 23% higher than its Dec. 10 price.
Casey’s may be the best publicly owned gas station chain around. It’s worth considering as a retailer or a bet that we’ll be traveling again soon.
At the time of publication, Dana Blankenhorn had a long position in BBBY.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
