CASY - Casey's General Stores Stock: Growth Is There But Let It Breathe

2023-12-12 11:55:33 ET

Summary

• Casey's General Stores, Inc. shows growth potential but is currently fairly valued, if not overvalued.
• The company reported a 2% increase in total revenue in its fiscal Q2, with flat same-store fuel gallons but growth in gross profit from fuel sales.
• Casey's is expanding to new markets and expects 9% EBITDA growth for fiscal year 2024.
• Some leverage here but ample liquidity, with a big push to open new stores which will weigh on operating expenses.
• Repurchases should boost EPS.

Today we were asked for our opinion regarding Casey's General Stores, Inc. (CASY). This is a stock we have previously traded but have not checked in on in some time. Our review suggests the growth is still there, but the valuation is getting a bit stretched. As such, with the bump we are seeing from the just-reported fiscal Q2 2024 earnings , we would not chase the stock here. We would let it come down to about the $260 mark before considering new entry.

For new buyers, we rate shares a hold, and the most actionable thing new money could do is wait. However, for those who like to use options for entry, one might consider selling some puts at a lower strike to define entry and/or pocket some premium. While specific guidance on strikes, expirations, spreads, etc. are reserved for our investing group members, we do believe it is worth noting the potential here to do so if you agree that a lower entry is preferred and likely in the next market pullback.

In the medium term, we are looking at a pretty healthy chart, but these gap-ups, which stem from growth , have led to a stretched valuation in our estimation. While there is a dividend here , it is more of a token of appreciation, with a paltry yield of just 0.59%. Right now we are not seeing the right combination of growth and value to justify chasing the stock, with Seeking Alpha's Quant ratings assigning a B- to growth (that is decent), but a failing D- to value. Most notably, we see strong EBITDA and EPS growth, though sales growth that leaves something to be desired, while free cash flow has not expanded with the pace of other key metrics.

On the valuation front, near 22X FWD is expensive for the growth on display in our estimation, while the EV/EBITDA growth of 11.5X is average at best. Although the PEG ratio looking forward is just beneath 2.0, which is generally a level we consider a buy, the shares in our opinion are appropriately if not overvalued. In this column, we discuss the company and the just-reported earnings.

For those unfamiliar, Casey's and the companies under it operate convenience stores, so-called "Casey's General Stores" as the name implies, and other "Casey's" branded shops. Basically they sell what one would expect from a convenience store, such as snacks, quick made, pizza, sandwiches, sodas, beers, tobacco products, and other items one may need quickly or for the road, including gasoline.

In terms of revenue, the company reports its fuel sales, and inside store sales, separately. Fuel sales often depend on price, so are more volatile. Total revenue of $4.06 billion rose just 2% from last year, and was in line with expectations. Not a lot of growth there. Same-store fuel gallons were flat compared to last year's comparable quarter, though the fuel margin was $0.423 per gallon, which led to a growth in gross profit there of 8.6% to $308 million. Inside same-store sales, where customers are buying their snacks and supplies, increased 2.9% compared to the prior year, and 11.0% on a two-year stack basis, with gross margins of 41.1%. Total inside gross profit increased 9.7% to $553.3 million compared to the prior year.

When we factor in the sales growth of 2%, we thought the margin growth was strong. However, operating expenses increased 7.5%, though 3% of the increase is due to operating 129 more stores than the prior year. Total same-store employee expense contributed to 1% of the increase, as the increase in labor rate was partially offset by a reduction in same-store labor hours, while routine operational expenses were up 3%. That said, net income, EBITDA and EPS all grew from last year. EBITDA rose 13% from a year ago to $306 million, with net income of $159 million, translating to EPS of $4.24, which rose 16% from a year ago. At 22X FWD EPS, this growth is average in our opinion.

One thing we do like here is that Casey's is expanding to new markets. Casey's built or acquired 59 stores in the quarter and recently entered Texas, its 17th state, with a 22-store acquisition that closed in November. That said, there is much more room for geographic expansion.

What about the balance sheet ? Well, the company ended the quarter with approximately $1.3 billion in available liquidity. Of this, $410 million is in cash and cash equivalents on hand and $900 million is on existing lines of credit. That said, long-term debt and lease obligations, net of current maturities, is $1.6 billion. So, there is some leverage here, but nothing overly risky. We also liked the $44 million decline in inventory as well year-to-date, suggesting the company is moving its merchandise. With margin strength, it also means the company is not being overly promotional. That is a strength.

As we look ahead for the rest of the fiscal year, expectations merit a hold here, and a wait for a pullback. First, fiscal 2024 EBITDA growth is expected to be around 9%. EPS will be helped by share repurchases, and Casey's expects to repurchase at least $100 million in shares this fiscal year. Same-store inside sales are expected to increase 3.5% to 5%, while same-store fuel gallons sold to be between negative 1% to positive 1%. Bit of a mixed outlook there. However, the company upped its guidance to open 150 stores this year, versus 110 previously expected, which is a long-term positive but will weigh on operating expenses as more costs are incurred to open these stores. For the fiscal year, we are targeting $12.50-$13.25 in EPS based on these expectations.

Overall, we like the Casey's General Stores, Inc. growth here. This is a quality company, but the valuation is a bit stretched for this growth. Long term, we see shares going higher, but in the near term, it is best to wait for a breather, or to sell puts to define entry.

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