CASY - Casey's General Stores Is Still Overpriced

Summary

• I think the latest financial results for Casey's General Stores, Inc. have been spectacular, especially compared to the previous year. This is remarkable given how well things went last year.
• In spite of this, CASY shares are a bit cheaper than they were when I last reviewed the name. The problem is that "cheaper" is not the same thing as "cheap."
• Although I normally like to sell deep out of the money put options on companies like this, the premia on offer don't make the exercise worth it in my view.

If you read my stuff regularly, you know that one of my more odious personal habits is the fact that I’m an inveterate braggart. If I buy a stock and it rises dramatically in price, I absolutely can’t wait to take credit for that performance. I think the universe has a tendency to balance things out, though. I win some, for sure, but I also definitely lose some.

With that out of the way, it’s time to write about Casey's General Stores, Inc. ( CASY ). Way back in April, I recommended that people continue to avoid the stock . Since that recommendation, the shares are up about 15.8% against a loss of about 10.5% for the S&P 500. I just want to let that relative performance sink in for a second before continuing. Although I didn’t lose capital by avoiding this trade, I lost a great deal of upside, and that’s frustrating on some level.

In this piece, I want to write about whether it makes sense to finally bite the bullet and buy this stock or not. I’ll make that determination by looking at the most recent financial history, and by looking at the stock as a thing distinct from the underlying business. I also want to explore whether there is a way to make some money by selling put options, because that’s been a very profitable strategy for me in the past.

We’re all busy people. I’m assuming that you readers have supermodels to date, and wonderful exotic vacations to go on, while I busy myself with cat videos and “Young and the Restless” reruns. Given that, I write a “thesis statement” at the beginning of each of my articles as a way to help save you some time, because I’m absolutely driven to make your lives as pleasant as possible. It’s in this paragraph that you get a little bit more than bullet points, but much less than the whole article.

In spite of the fact that the shares are quite a bit higher now than they were back in April, they’re actually marginally cheaper. This is obviously because the company has grown massively since then. “Cheaper” is not the same thing as “cheap,” though, so I’m going to remain on the sidelines here. Given the paltry dividend yield, I think it’s possible to find greener pastures elsewhere. I’d rather buy cheap stocks that offer very juicy dividends, because I think that’s safer , and more predictable, and I’m a fan of predictability, especially now. I may miss out on some further upside, and my old slow and steady predictable businesses may not do as well relatively, but I’d rather miss some upside than risk capital at the moment.

For that reason, I continue to recommend that investors avoid this stock. Finally, in case you missed it in the “bullet points” above, the premia on offer for put options with reasonable strikes is way too low in my estimation. Thus, I think there’s nothing to be done here but reconsider this business once the stock drops in price.

Casey’s General Stores Financial Snapshot

The first six months of 2022 were a great period for Casey’s General Stores. Revenue and net income were higher by 30.8% and 34.4% respectively. This is particularly impressive in light of the fact that last year was a banner year for the firm. Management has rewarded shareholders by boosting the dividend by just over 10%. Additionally, I like the fact that the company has lowered the long-term debt relative to this time last year. Although it’s high by historical standards, as I’ll write about below, from last year to this the trend was in a very positive direction.

When I review the longer-term financial history at Casey’s General Stores, I’m reminded of a Saturday Night Live sketch from the 1970s. It wasn’t funny, obviously, but for some reason the Boomers that I was subjected to at the time would repeat the line back and forth at each other incessantly, and they found it hilarious. Anyway, the skit involved the actor Garrett Morris repeating the line “baseball been berry, berry good to me.” I think the pandemic has been “berry berry good” to Casey’s. Specifically, revenue and net income during the first six months of 2022 were higher by 65% and 73% respectively. Management has rewarded shareholders accordingly, given that the dividend has risen by about 21.8% since then.

The problem, from my point of view, is that the capital structure has also deteriorated in this time. Specifically, long-term debt has grown by just under $381 million, or 29.5%. That is quite the change to the capital structure in a few short years in my view. The assumption is that the current state is a “new normal” and that we shouldn’t be bothered by $1.67 billion of debt. Admittedly, cash on hand represents about 24.8% of long-term debt, but I remain somewhat troubled.

That written, I think the dividend remains well-covered, so I’d be happy to buy this stock at the right price.

The Stock

I sometimes point out that the phrase “at the right price” is a term that I’ve used to talk myself out of some great investments over the years. Casey’s is a concrete example of this phenomenon. The stock has soared higher, while I’ve clutched my proverbial “pearls” about the valuation. I’ve been cautious because I’ve been given many painful demonstrations of the fact that a great company can be a terrible investment. This is why I treat the stock and the company as two distinct things. The company sells food, prepared food etc., and the stock is a speculative instrument that gets buffeted by a host of factors, some of which have nothing to do with those activities. One of the things that affects the performance of a given stock, for example, is the crowd’s ever-changing views about the desirability of “stocks” as an asset class. There’s no way to prove this definitively, as it’s an obvious counterfactual, but a reasonable argument could be made to suggest that Casey’s stock would have risen even higher since I last wrote about the investment if the S&P 500 hadn’t dropped about 10.5% since then.

So, this is why I consider the stock as a thing distinct from the business. The former is often a poor proxy for what’s going on at the company, and I think it’s possible to profitably exploit this disconnect. In my view, the only way to successfully trade stocks is to spot the discrepancies between what the crowd is assuming about a given company and subsequent results. What I want to see in this regard is a stock that the crowd is somewhat pessimistic about that goes on to exceed expectations. When the crowd is pessimistic, the shares are cheap, which is why I try to buy only cheap stocks. Given that I considered the shares to be expensive fully 15.78% ago, I’m not optimistic, but the company has done really well since, so I’m going to try to keep an open mind.

In my previous piece, in case you’ve forgotten, I remained cautious about this stock because the shares were trading at a P/E of about 24.2 times earnings, and the shares were trading near a multi-year high price to sales ratio of about .657 times. Additionally, the dividend yield had cratered as the stock price rose, and marginal investors were only receiving cash of .66%. I reasoned that paying more and receiving less was not a great combination, and based on that decided to refrain from investing. Fast forward to the present, and here’s the current lay of the land. The shares are actually about 8.3% cheaper on a P/E basis, and about 6.4% cheaper on a price to sales basis per the following:

At the same time, though, I can't escape the fact that the yield is about 11% lower than it was when I last reviewed the name. The dividend is so paltry that investors today must earn all of their returns by capital appreciation. I am growing worried about the prospects for ongoing returns of this sort.

The shares have risen dramatically higher, but ironically enough they’re actually a touch cheaper than when I last reviewed the name.

My regulars know that I think ratios can be instructive, but I also want to try to work out what the market is "thinking" about a given investment. If you read my stuff regularly, you know that the way I do this is by turning to the work of Professor Stephen Penman and his book "Accounting for Value." In this book, Penman walks investors through how they can apply some pretty basic math to a standard finance formula in order to work out what the market is "thinking" about a given company's future growth. This involves isolating the "g" (growth) variable in this formula. In case you find Penman's writing a bit opaque, you might want to try "Expectations Investing" by Mauboussin and Rappaport. These two have also introduced the idea of using the stock price itself as a source of information, and we can infer what the market is currently "expecting" about the future. Applying this approach to Casey’s General Stores at the moment suggests the market is assuming that this company will grow earnings at a rate of ~8.7% in perpetuity. I consider that to be a very optimistic forecast for any company, even one with a recent growth profile like this.

Given all of the above, I’m going to continue to avoid this name. The shares are more attractively priced now, but they’re still objectively expensive in my view. Although I think the dividend is secure, I think there are far higher yields out there that are even more compelling. I’m at that stage in life where preservation of capital is much more important than trying to squeeze a few more percentages out of my investments, and so I’ll remain on the sidelines for Casey's General Stores, Inc. At some point, I think the near record valuations and near low dividend yields will catch up to this wonderful business.

Options As Alternative

Those who follow my stuff know that I like to sell deep out of the money puts on the stocks of very profitable companies like this one. I do this because I consider these trades to be “win-win.” If the shares remain above the strike price, I pocket the premium. If the shares fall, I’m “forced” to buy the shares of a wonderful business at a price that I like.

While I would normally recommend this strategy for Casey's General Stores, Inc., I can’t in this case because the premia on offer for reasonable strike prices is terrible in my view. For example, the February puts with a strike of $220 is currently bid at only $.40. That is way too small a yield to make the exercise worthwhile in my view. For that reason, I’m obliged to just sit and wait for what I consider to be the inevitable price drop in Casey's General Stores, Inc. from current levels.

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