CASY - Casey's General Stores: Much To Like About The Investment Thesis Except The Price

2023-08-17 13:29:43 ET

Summary

• Casey's General Stores, Inc. has resumed its M&A activities after refraining from doing so for a while.
• The company focuses on smaller towns with fewer than 5,000 inhabitants to create a deep-rooted presence.
• Casey's has announced plans to open 350 new stores in the next three years and aims to grow EBITDA by 8-10% per year through 2026.

In March, I believed it was time for Casey's General Stores, Inc. ( CASY ) to refuel on M&A. This came after the business a role of consolidator in the small-town general store market, and while it typically pursued bolt-on M&A to grow the business, it has refrained from doing so for a while.

With (financial) room to start M&A again, I liked the business, but felt that the valuation was a bit too rich to my taste. While the company has delivered on another bolt-on deal, with the addition of some +60 EG stores and while the business was doing fine, prices have run away again in recent weeks, leaving me on the sidelines here.

Small Town General Stores

By the year 2000, Casey's General Stores had grown its business to operate over 2,000 convenience stores chains and petrol stations in mostly Central and Eastern states of the U.S. The company deliberately focuses on smaller downs, typically having fewer than 5,000 inhabitants, in order to create a deep rooting and distinguish itself furthermore by offering higher service levels.

Competing against some big names like Speedway, Couche-Tard and 7-Eleven, Casey's General Stores has focused on consolidation as well, having doubled sales from $5 to $10 billion between 2009 and 2019. This was driven by a 50% increase in the unit count, with the remainder due to same store sales growth (and some inflation of course).

For the fiscal year 2020 (ending in April of the calendar year 2020), the company posted a 2% fall in sales to $9.2 billion, on which operating earnings of $395 million were reported, with earnings coming in at $7.10 per share. Note that valuations were not cheap with shares trading around the $180 mark pre-pandemic.

During the pandemic, the business saw lower revenues (driven by lower fuel pricing) as the volatility was quite good for the bottom line, allowing the company to acquire the parent company of Bucky´s Convenience Stores in a $580 million deal.

Making Inroads

Since the darkest days of the pandemic, shares of the company have traded in a $180-$250 range as the business has gradually seen further improvements. In the summer of 2022, the company posted revenues of $13.0 billion (aided by higher fuel prices) on which operating earnings of $440 million were reported as earnings of $313 million came in at $9.10 per share. The unit count rose to nearly 2,500 stores, amidst bolt-on M&A and organic store openings.

Net debt of $1.5 billion was not particularly worrying with EBITDA having improved to about $800 million. For the first two quarters of the fiscal year 2023, the company already posted $8.5 billion in sales and earnings of $7.75 per share, due to the fact that the first half is seasonally stronger and that fuel prices were high. Based on the momentum, I believed that $13 in earnings power should be attainable back in March. With net debt down to $1.3 billion and EBITDA moving towards the billion mark, it was time for some M&A again.

Nonetheless, I was not puling that trigger at levels just above the $200 mark as I feared the sustainability of these earnings, making me wait for an entry point sub $200.

Running Away

Since March, shares have gradually moved higher and in fact trade at the higher end of the trading range again, now trading at $249 per share, near the highs around $257 per share.

In June the company posted its full year results with revenues posted at $15.1 billion on which operating profits of $588 million, and net earnings of $447 million were reported. Earnings per share came in at $11.91 per share, coming in a tough light. It should be said that while a 16% increase in full year sales was very strong, fourth quarter sales and earnings were down a bit, due to lower fuel prices, among others. Net debt came in at $1.3 billion, as full year adjusted EBITDA was posted at $959 million.

The fiscal year 2024 outlook was a bit mixed, with inside same-store sales growth seen between 3 and 5%, yet operating expenses to be up between 5 and 7%. This marks a tough set up, although that the company expects slightly higher gross margins to cancel out operating expense inflation.

Later that month, Casey's General Stores announced a new strategic plan for the coming three years, targeting another 350 store openings during this period of time, while announcing another range of strategic imperatives, all with the goal to grow EBITDA by 8-10% per year through 2026.

In August, the company made a major deal to achieve these targets as it acquired 63 convenience stores from EG Group, with the Minit Mart and Certified Oil banners located in Tennessee and Kentucky. No financial details have been announced, but the pro forma impact on the store count is about 2.5%, setting the company up for another year of growth in 2024.

With Casey's General Stores, Inc. earnings power running a bit higher than I believed, I am a bit more upbeat than I was in March, but at the same times recognize the inflation headwind to the business, as well as the fact that shares have convincingly moved higher, of course. While I feel comfortable to up my entry target to $200, I have no desire to chase the shares here, even as the company recently convincingly hiked the dividend by 13% to $0.43 per share (on a quarterly basis).

Using a $12 earnings per share number, with some risks for a margin retreat, I think that $200 marks a nice entry point for this long term value creator Casey's General Stores, Inc.

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