CASY - Casey's General Stores: Time To Refuel On M&A

2023-03-05 06:45:17 ET

Summary

• Casey's General Stores plays a long-term consolidating role in the small-town general store market.
• The company typically pursued bolt-on deals but has refrained from doing so for some quarters.
• I like the consolidating nature, looking to add on dips as a current 20 times multiple feels a bit rich.

Shares of Casey's General Stores ( CASY ) have done generally alright over the last couple of years. In November 2021, I believed that Casey was showing solid execution, although still being aggressively priced in by investors.

At the time the company had seen continued operating momentum after the pandemic provided a windfall to 2020 profits. The long-term role of consolidator was to be applauded, although I called prevailing earnings multiples a bit demanding on the back of a favorable interest rate environment.

A Recap

By the end of 2020, Casey's had grown to operate over 2,000 convenience store chains and of course petrol stations in Central and Eastern states in the US. The company has a deliberate strategy to focus on stores which are located in smaller towns, typically less than 5,000 inhabitants, creating a deep rooting in the community with heritage and high service being other key distinguishing factors.

The company was competing against the likes of Sunoco (SUN), Speedway, Couche-Tard (ANCTF) and 7-Eleven, many of which have been trying to consolidate operations. Casey has certainly been taking its role as consolidator seriously, having doubled sales from $5 billion in 2009 to $10 billion in 2019. The truth is that this achievement has been based on a 50% increase in the unit count, with inflation and same-store sales accounting for the remainder of growth.

In the pandemic year 2020 (which ended in April of that year), the company posted a 2% fall in sales to $9.2 billion as operating earnings of $395 million come in at 4% and change, translating into earnings of $7.10 per share. With the pandemic really starting to impact the results for the first quarter of 2021 onwards, the company was seeing lower revenues (amidst lower fuel prices) yet much higher margins as well. The company took the opportunity to acquire Buchanan Energy, the owner of Bucky's Convenience Stores, in a $580 million deal.

Through November 2021 shares traded at $194 per share, after shares peaked at $220 in the spring of the year. In the meantime, the company has been pursuing some bolt-on deals at times and in June 2021, the company posted annual earnings of $8.38 per share for that fiscal year. With shares trading at 23 times earnings and leverage being reasonable, I was not too impressed with the risk-reward situation. The market liked the role as consolidator, but I believed that valuations had gotten a bit rich, having lifted all boats.

Stagnation

Since trading at $194 per share nearly one and a half year ago, shares have been trading range bound in a $180-$250 range, now trading in the middle of the range at $213 per share, still marking 10% returns since late 2021.

In the meantime, it has been rather quiet on the corporate front. In the summer of 2022, the company posted its fiscal 2022 results with revenues advancing to $13.0 billion on which operating earnings of $440 million and net earnings of $313 million were reported, up to $9.10 per share. The company ended the year with nearly 2,500 stores, after having added just over 200 stores during the year. Net debt of $1.5 billion made that leverage was not an issue as EBITDA improved to $800 million, for a leverage ratio just below 2 times.

The company has seen a solid start to 2023 with first quarter sales up 40% to $4.5 billion as earnings per share rose ninety cents to $4.09 per share. Second quarter sales rose 20% to $4.0 billion (as growth in both quarters has been driven by higher fuel prices), with earnings up more than a dollar to $3.67 per share. This means that earnings were up nearly two dollars to $7.75 per share for the first half of the year, and if we factor in the seasonality, I believe an $11 per share number should be (easily) attainable this year.

Net debt was down to $1.3 billion as EBITDA is coming in more than one hundred million ahead of last year, that is in the first six months of the year. This makes that EBITDA trends around a billion, for a leverage ratio just in excess of 1 times now.

Quite Upbeat

With the company now essentially trading around a 20 times earnings multiple, that multiple has come down a bit over time, although I fear that this is attributable to the strong margins reported this year, as the questions can be asked if this can be sustained over the cycle.

On the positive side, following a lack of acquisitions as of recent, the company has rapidly deleveraged its balance sheet, giving the company plenty of firepower to pursue bolt-on deals to come, probably needed to drive growth.

At a 20 times multiple, appeal is not imminent, but the situation is getting a bit friendlier for investors, although given the positioning of the business and the current levels of interest rates, I am looking for an entry point sub $200, preferably in the $180s before getting involved.

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