Taking a first look at Casey's General Stores, another stock pitched by Dan Loeb
Yesterday, I analyzed mortgage originator and servicer Rocket (RKT) through my "first look" lens. I was interested to delve deeper because it's one of three stocks my friend Dan Loeb of hedge fund Third Point pitched in his recent second-quarter letter to investors.
Continuing this series, today I'll take a look at the second stock from his letter: convenience-store operator Casey's General Stores (CASY).
Dan details how Casey's differentiates its business from normal gas stations by selling fresh food like pizza, brisket, and chicken wings:
It is a "boring" business to some, but there is 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...
He also notes that although it's already the third-largest convenience-store chain in the U.S. by store count, it has plenty of runway for 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.
That's a compelling pitch, and the business seems easy to understand. So let's dive into the financials...
Casey's has one of the most beautiful stock charts I've ever seen. It has been growing steadily for four decades:
Not surprisingly, the stock has tracked the company's steady growth in revenue and net income, especially over the past two decades:
Casey's is a low-margin business, which is consistent with a highly competitive industry – and the fact that 61% of sales come from gasoline:
But I'm not worried about these margins. They're similar to Walmart (WMT) and Costco Wholesale (COST), some of the greatest businesses of all time.
Casey's spends a fair amount on capital expenditures ("capex") every year, primarily for opening new stores. But it has generated consistently positive free cash flow ("FCF"). And that growth has tracked net income over time, which I always like to see:
The company has added more than $1 billion of net debt since last year. But for a strong balance sheet like Casey's, $2.6 billion is still quite low:
Casey's has become more acquisitive in recent years, as Dan noted in his letter. Most notably, it spent $1.15 billion to acquire around 200 Fikes stores.
It also pays a small dividend, which currently yields 0.4%. And it has reduced its share count by 26% over the past two decades through buybacks:
Overall, I love what I see here...
The business is clearly very well managed and has a strong balance sheet. Plus, it grows consistently even during periods of economic turmoil (profits actually increased in 2008 to 2009 and 2020 to 2021).
But what about its valuation?
At yesterday's closing price of $513.39 (near an all-time high), the company has a market cap of $19.1 billion. Adding the $2.6 billion of net debt, its enterprise value is $21.7 billion. That's equal to 1.4 times trailing-12-month revenue.
Analysts expect the company to earn $16 per share this year and $17.97 per share next year, representing growth of 12.3%. That means the stock is trading at 32.1 times this year's earnings and 28.6 times next year's.
Those are rich multiples... But they're not crazy in light of the company's attractive financials, long history of steady growth, and future growth prospects.
And as this chart from the company's latest investor presentation shows, Casey's currently trades well below the median for other retailers and quick-serve restaurants. It clearly has far more growth potential given its size relative to these giants:
I think Casey's is worth an even closer look... So stay tuned for tomorrow's e-mail.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. – Happy birthday to my mom, who turned 85 yesterday. I really won the lottery by getting the parents that I did. Do you think there's a resemblance?
