Casey’s: Attractive In The Long Run – Casey’s General Stores, Inc. (NASDAQ:CASY)

Casey’s General Stores (NASDAQ:CASY) reported earnings slightly ahead of expectations, while revenue missed estimates. The company also reaffirmed same store sales and margins guidance for 2020. Shares have briefly reacted positively to the report during an ugly trading day on March 9th, but has not been able to disconnect from the highly volatile trading environment in the following days.

While short-term scenario is quite uncertain at the time being, I remain confident in Casey’s business outlook in a longer time frame and, therefore, see the company as an interesting asset to hold over the long run.

Q3 2020 Earnings Highlights

Casey’s reported diluted earnings per share of $0.91 in the quarter finished on January 31st, which was $0.02 above estimates, and $0.22 below a year ago. Actually, lower earnings compared to last year were influenced by tough margin comps in fuel category and 10% growth in operating expenses, as the company is currently operating 70 additional stores compared to the same period last year, as well as increased technology costs due to the deployment of its digital systems.

Despite missing expectations by 1.5%, revenue was handily above a year ago, totaling $2.2 billion in the quarter. This growth was largely influenced by 3% growth in the number of stores, which reached 2.193 in the end of quarter, but also reflects the same-store sales growth during this period. Same-store sales were primarily driven by the increase of 3.5% in same-store grocery and other merchandise category and growth of 2.8% in prepared food and fountain category, offsetting the decline of 2% in same-store gallons in fuel category.

Financial figures aside, this recent quarter marked the launch of Casey’s rewards program, which debuted on January 7th and has already reached nearly 1.8 million members so far. According to the management team at the earnings’ call, the activity is exceeding expectations, and in the long term, Casey’s expects to capture customer data and benefit from it through improved engagement and customer services.

Furthermore, the company continues to implement several initiatives, such as the integration of its price optimization platform inside the stores and in fuel category at the point of sale, targeting to improve price flexibility and margins over time.

Business Outlook

Despite recent uncertainties, given the coronavirus outbreak and its impact on the U.S. economy, the company has maintained its fiscal 2020 guidance, asserting that the company may be more insulated due to its rural geographic presence compared to its peers.

In addition, I also see that part of the immediate consequences of changes in behavior caused by coronavirus, such as the preference for delivery meal instead of the dine-in option, just exacerbates an existent trend in the industry toward delivery meal, as pointed out by Casey’s at its 2020 investor day held on January 9th. Therefore, future growth strategy considered by Casey’s already incorporates the enhancement of its delivery option.

Source: Casey’s 2020 Investor Day

Top-line growth is also expected to continue to increase supported by the company’s strategy to expand its footprint through organic growth and target acquisitions, on top of 600+ stores added over the last 10 years. In the fiscal year 2020, the company remains on track to open 60 new stores, while acquiring 20 stores, just below the number of 25 originally planned, as part of its plan to add 430 stores over the subsequent 4 years.

In the long run, according to the company forecasts, there is still a sizable addressable market of near 2,500 stores in 400 small operators as potential acquisition targets. Therefore, Casey’s is likely to sustain its growth path in large part based on acquisitions, even if organic growth is relatively impacted by a potential recession in the short term.

Financial Analysis and Valuation

We are going to compare Casey’s financial and valuation metrics with companies in the consumer sector using as a reference the XLP – Consumer Staples Select Sector SPDR Fund.

From the earnings quality perspective, we see on the table below that, although Casey’s lags behind in terms of both gross profit and EBITDA margins, both metrics have increased much more than the peer group over the last 5 years. This recent improvement is consistent with the company’s efforts to boost profitability, including price optimization, centralized procurement, and increase of private label items in the overall portfolio.

Source: Data from Finbox, consolidated by the author

Moving to the financial health, Casey’s shows a better than average debt profile, standing at 2.32x total debt/EBITDA. This situation tends to improve over time as the company has just completed a debt refinance so that its average cost of total debt decreased to nearly 3.3% a year.

Source: Data from Finbox, consolidated by the author

On the valuation side, looking at the table below, Casey’s shows a higher P/E multiple compared to its peers, but a slightly lower forward EV/EBITDA and PEG ratio. Under a normal environment, this premium in P/E valuation could be at least partially justified based on Casey’s above-average, long-term earnings growth rate. However, we should expect that current earnings estimations should be broadly reviewed as soon as analysts have a clearer view regarding the extension of the lockdown period due to coronavirus and its impact on the economic activity in the next quarters and 2021.

Anyway, looking at historical figures, it seems that the positive trend in margins growth in the recent years is somehow contributing to the premium valuation, and despite future earnings reviews, I believe Casey’s premium relative to the peer group is not going to change dramatically going forward.

Source: Data from Finbox, consolidated by the author

Overall, Casey’s is faring better than the peer group in terms of stock performance over the past 6 and 12 months. This positive momentum is confirmed, taking into consideration its relative position compared to last 52 weeks’ high/low and moving averages, as it ranks in the 1st or 2nd quintile. Meanwhile, despite the recent drop in prices, oversold conditions were not reached yet, since the RSI (14 days) is still at mid-40s, considering the close price as of March 16th, which suggests some resilience in stock prices.

We cannot forget, however, that the next support level sits at $133 level, which still provides significant room for further declines before a bottom is reached.

Source: Data from Finbox, consolidated by the author

Takeaway

While the current scenario is unclear in the short term, I believe that Casey’s offers a solid pathway to top-line growth and margins expansion in the long term. Additionally, despite stock valuation is not compelling at the current level compared to other consumer names, Casey’s remains an attractive stock as the company is probably going to be less affected by this type of new environment caused by the coronavirus outbreak, due to its footprint in rural areas.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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