A closer look at Casey's General Stores
Picking up where I left off yesterday...
In yesterday’s e-mail, I took a first look at convenience-store operator Casey’s General Stores (CASY).
As a reminder, my friend Dan Loeb of hedge fund Third Point had pitched the stock in his recent second-quarter letter to investors. So that got me interested...
Yesterday, I showed its excellent financials. As I explained, these might justify the stock's rich valuation. So let's take a closer look...
Casey's operates convenience stores and gas stations that look like this:
If you live in Middle America, you probably recognize Casey's. The company has about 2,900 stores in 19 U.S. states. Here's a map of the footprint from the company's latest investor presentation:
Casey's is the third-largest convenience store in the U.S. And, to my surprise, it's also the country's fifth-largest pizza chain.
The company differentiates itself in a number of ways...
This starts with a focus on small towns. About two-thirds of its locations are in towns with populations of less than 20,000. As the company notes in the presentation, these areas are "less expensive to build, buy, and operate units."
Casey's also has private-label brands and food offerings that drive higher sales and margins in its stores. Take a look at this chart from the presentation:
And Casey's has a rewards app used by 9 million customers – accounting for more than half of its sales. Take a look at this next chart from the presentation:
To get a sense of the company, here's what one of my readers, Jim C., e-mailed me after reading yesterday's e-mail:
I grew up in Iowa in the '70s and '80s, and Casey's was the only gas station and convenience store in our little farm town of 800 near Ames, Iowa, home of Iowa State University. Between high school and college, I made pizza at Casey's in the late '80s as a summer job. It was also the place where I would see my friends on the way to and from high school as we all stopped in to pick up a drink and a snack.
Since then I've lived all over the country and experienced many different types of regional convenience stores, including some of the best like QuikTrip. However, what Casey's has done in the last decade or two has been remarkable.
Jim also noted that he had never invested in Casey's. In fact, he hadn't realized that the company was publicly traded. But after reading my e-mail, he said he wasn't surprised to see how successful Casey's is.
In his second-quarter letter, Dan mentioned that Casey's looks like a "boring" business. But as he notes, there's an "art" to boring:
We believe the returns and their consistency have been exceptional and stem from a quirky counter-positioning of the business. When a company chooses not to do the easy thing, it is often a powerful signal that something special is at work. Selling gas and cigarettes is easy. Selling fresh food at scale as successfully as Casey's is not.
As Dan says, "figuring out food creates a powerful feedback loop":
Casey's earns more profit dollars per visit, enabling them to price fuel at a discount to independent gas stations and pizza at a discount to competing QSRs. Consumers save on both purchases, and the result is a brand beloved by a loyal customer base, whose Net Promoter Scores look nothing like the rest of the industry.
The more I learn about Casey's, the more impressed I am...
I feel a bit like I'm going back in time and looking at Walmart (WMT). That's another exceptionally well-run company from – and serving – Middle America.
Care to guess what year Walmart had $16 billion in annual sales, as Casey's does now? 1987!
The parallels are striking...
Walmart's net income that year was $628 million. That's slightly more than Casey's $547 million in the past 12 months – a difference due to 61% of Casey's sales coming from low-margin gasoline.
And Walmart's stock was just about as richly valued at the end of 1987 as Casey's is today...
Back then, Walmart traded at an enterprise value ("EV") to trailing 12-month sales of roughly 1.6 times. As I noted yesterday, that figure for Casey's is about 1.4 times.
Meanwhile, Walmart back then traded at about 18.3 times EV to trailing 12-month earnings before interest, taxes, depreciation, and amortization ("EBITDA"). This compares with roughly 18.0 times for Casey's today.
And back then, Walmart traded at around 41.0 times trailing earnings per share. That figure for Casey's today is about 35.4 times.
Walmart is a good example of how long-term growth is massively more important to a stock's performance than the valuation at the time of purchase...
It turns out that investors who paid a seemingly high 41 times trailing earnings for Walmart at the end of 1987 – a split-adjusted $1 per share – were in fact getting a huge bargain. The stock is up roughly 100 times since then (plus dividends)!
Take a look at this long-term chart:
So that raises the key question for investors today...
Does Casey's have growth prospects that justify paying 35.4 times trailing earnings, 32.1 times this year's expected earnings, and 28.6 times next year's?
Well, Dan thinks so...
As he noted in his letter, Casey's stock has performed well over the past 10 years. And even with the stock surging nearly 30% this year, Dan thinks "the team from Des Moines is just getting started."
As he said regarding future growth:
The recent acquisition of 200 stores from Fike's marked [Casey's] entrance into the South, and management has since commented that Texas alone could offer 2,000 more units (vs. today's national footprint of 2,900), reinforcing our belief that there are plenty of towns across the South that would love a Casey's.
And he believes that the growth story for locations is "likely to play out more quickly than broadly expected":
In the Fike's example, Casey's paid 11x headline EBITDA, but the pro forma multiple looks more like 7x when pizza is rolled out across the footprint. How many companies have the luxury of replicable, accretive M&A at EBITDA multiples that are half of its own trading levels?
I also noticed a bullish pitch for Casey's on my favorite stock-idea website: Value Investors Club. A member posting under the handle krusty75 pitched the stock last September.
Only members can see the full ideas until 45 days after they're posted. (The entire Casey's pitch is here – which guests to the site can still see by submitting a valid e-mail address.)
In the pitch, krusty75 makes the case for a long runway for growth. Krusty75 notes Casey's historical "buy and build" strategy:
From FY-10 through FY-24, the company added more than 1,300 stores, 53% from acquisition and 47% from new builds. This nearly doubled the company's store count. If anything, I think it's likely that the company's store growth accelerates in the coming years, mainly from M&A.
And as Krusty75 continues:
CASY's smaller rivals are simply outgunned as they're forced to compete against larger players who have scale benefits from logistics and operating costs, robust IT platforms and loyalty programs, and, critically, more and better inside products. CASY can buy these businesses at very accretive prices, usually mid-single digit multiples or less after synergies (even Fikes, a strategic acquisition, is only 7.3x after tax benefits and synergies).
The pitch also acknowledges another key factor for potential growth:
Furthermore, CASY's has massive whitespace in its distribution footprint with ~75% of towns in its targeted rural demographic lacking a Casey's location. It's not difficult to imagine CASY with 50-100% more stores in ten years (compared to +60% over the last ten years)...
Krusty75 says it's likely that Casey's "will double its store count from here." Of course, the key question is how long that will take.
To krusty75's point about "whitespace," take a look at the graphic below from the Casey's investor presentation. It shows that "~75% of towns between 500 and 20,000 in our [distribution center] footprint do NOT have Casey's":
In summary, I think Casey's is an exceptional, long-term growth story. So I agree with Dan's conclusion in his letter:
In Casey's we see a world class management team with a differentiated mousetrap and a decade of profitable growth ahead of them – whether they are labeled a restaurant or a gas station or a general store is semantics. As the company's slogan goes, "It's Not Crazy, it's Casey's!"
Here at Stansberry Research, as usual with an interesting setup like this, my team and I will be taking a deeper dive into Casey's.
If we decide the stock looks compelling enough to add to the Stansberry's Investment Advisory model portfolio, our subscribers will be the first to know – as always.
If you aren't an Investment Advisory subscriber already, find out how to become one as part of a special presentation right here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.