CASY's quarterly results

Investment Analysis Clubs Saul’s Investing Discussions
1

Here are CASY’s July quarter results as I paraphrased them:

Casey’s reported earnings of $1.57 up from $1.28.

We are off to an excellent start with strong sales, margin expansion in prepared foods, and favorable operating expenses. Earnings increased 23% despite a fuel margin decline of 1.4 cents per gallon compared to the prior year.

Fuel - Our goal for fiscal 2016 is to increase same-store gallons sold 2% with an average margin of 16.7 cents per gallon. For the first quarter, same-store gallons sold were up 3.4% with an average margin of 17.5 cents!

Same-store sales continue to benefit from low retail fuel prices. We sold 15.7 million renewable fuel credits for $8 million during the first three months of the year. Total gallons sold for the quarter were up 8% to 501.2 million gallons.

Grocery and Other Merchandise - Our annual goal is to increase same-store sales 6.2% with an average margin of 32.1%. For the first quarter, same-store sales were up 7.0% with an average margin of 32.6%.

Cigarette sales performed well, especially in our premium brands. The grocery margin is slightly over our annual goal, primarily due to the seasonal sales mix we typically experience in the first quarter. Total grocery sales were up 10.0% to $526.6 million.

Prepared Food and Fountain - Our goal for fiscal 2016 is to increase same-store sales 10.4% with an average margin of 60.8%. For the first quarter, same-store sales were up 10.3% with an average margin of 62.5%.

Many of our strategic initiatives are focused on driving sales to this category. Major remodels, 24-hour conversions, and pizza delivery continue to deliver impressive sales gains, and lower ingredient and supply costs enabled us to expand our margin. Total prepared food and fountain sales were up 14.8% to $223.4 million, and gross profit dollars grew 19.9% to $139.7 million.

Operating Expenses - Operating expenses were $263.6 million up from $244.3 million, up 7.9%. Credit card fees and transportation costs combined decreased approximately $2.3 million from a year ago due to lower fuel prices. These reductions were offset by expenses related to operating more stores than a year ago as well as the various strategic initiatives the Company continues to roll out.

Expansion - The Company’s annual goal is to build or acquire 75 to 113 stores, replace 10 existing locations and perform major remodels on 100 existing locations. As of the end of the quarter, the Company had opened 8 new stores, acquired 1 store, and replaced 7 existing stores. The Company had 17 major remodels under construction at the end of the quarter, along with 26 new stores and 4 replacement stores. "We are pleased with the pace of our new store construction progress. Major remodels have shown to be an excellent initiative that will drive better performance out of our existing store base.

Dividend - Board of Directors declared a quarterly dividend of 22 cents per share, payable November 16.

This gives them earnings of $4.91, a price at yesterdays’s close of $108.50, and thus a PE of 22.1. That gives them a rate of twelve month earnings growth of 55%, but I think this is unrealistic and will settle back to something more like this quarter’s rate of growth (or 22-25%), once some of the weaker quarters in the previous year drop out of the calculation. They look like a steady grower from here with a steady increase in dividend as well.

Best,

Saul

20 Likes
2

Saul,

Correct me if I am mistaken, but CASY’s growth trajectory seems pretty comparable to an old favorite of yours, WAB. Do you think of them similarly?

3

Saul, Correct me if I am mistaken, but CASY’s growth trajectory seems pretty comparable to an old favorite of yours, WAB. Do you think of them similarly?

Hi TP, I guess so. Very reliable but not wildly exciting. There are worse things in life.
Saul

4

Hi Saul,

First let me tell you THANK YOU as many others have expressed for all you bring to the boards.

Second, I really like CASY and almost pulled the trigger except for a couple things in the financials that are nagging me a little. It seems to me cash to debt ratio is out of porpotion to what I usually like to see. I imagine most is because of financing expansion. Also seems they carry a lot in accounts payable. The number seems pretty consistent year to year, so maybe isn’t a problem but I just can’t wrap my head around it. Accounts payable seem to run around 2 times or more higher than cash equivalents plus receivables. I am pretty new to doing “deeper digs” into financials, and very much a rookie when it comes to this kind of business, so it is very likely I am either missing something or not understanding correctly. Or both.

Any way you can shed a little light for me or at least give your thoughts?

Again Thank You!

Kevin

5

Hello Saul,

Thanks to your mention here some time ago, I have followed CASY and performed some due diligence. Here are my conclusions:

  1. Management has done a terrific job of exploiting opportunity in a difficult business and appears to have a significant runway for more of the same going forward. They simply have a better formula than the majority of their completion and will acquire, build, and/or remodel into new markets with good customer reception.

  2. The difficult question for me is what is a realistic valuation of their business? From your comments, I know that you realize that recent growth rates in EPS are unsustainable in this industry. At 22+ times trailing earnings, the share price seems quite rich given current prospects.

  3. I believe that you were initially attracted because of the explosive growth in eps occurring in FY2015. Going into FY2015 the average fuel margin attained by CASY over a 4 year period was 15.8 cents per gallon sold. (I have used the margin including the renewal fuel credit to make the comparisons apples to apples)To adjust for margin benefit from increased scale, I use 16.3 cents per gal. as “normal” fuel margin. Presumably because of lower wholesale fuel prices stemming from lower crude oil, the retail industry, incl. CASY, were able to expand margins. Additionally, the RINs (renewable fuel credit)fetched a higher price due to increased gallons and increased content of ethanol. This happy circumstance contributed 3 cents per gallon to CASY’s bottom line over my assumed “normal”. At 1.8 billion gal. sold, this represented $54 mil. pre-tax to the net income. Assuming a 36.5% tax rate, the contribution to eps was 87 cents per share. Thus, over 77% of the eps increase was derived from unusual fuel margins. As there was negative growth of .01 in FY14 compared to FY13, do you think you would have paid more than 20 times eps for CASY if FY15’s eps had grown around
    25%?

  4. While I haven’t done enough to estimate an appropriate price earnings, I intuit that it would be below 20 based on what I have done.
    If the pe begins to compress down the trail I will update my dd and try to come up with an attractive entry price as I believe the management is competent and shareholder friendly. Their accounting presentations are very transparent.

  5. As to the question earlier posed about their debt, working capital,
    and cash I believe that their relative balance sheet strength and scale allows them to get favorable terms on inventory so their accounts payable being high is a plus rather than a minus. They retain ample cash to run the business and back that up with a substantial line of credit that they hardly ever use.
    Best regards,

Mike

17 Likes
6

Thanks to your mention here some time ago, I have followed CASY and performed some due diligence. Here are my conclusions:

Hi Mike, Thanks for your interesting analysis. It’s a company that I like quite a bit, but will probably keep as a small position.
Best
Saul

7

Mike,

Lots of good food for thought in your post, but may I ask why are you so focused on their gas profits? If I’m not mistaken, that only accounts for about 25% of their gross profit:

http://secfilings.nasdaq.com/filingFrameset.asp?FileName=000…

I think the bigger underlying story may be the profitability of the non-gas categories, particularly prepared foods/fountain drinks. I.e., they are sort of a restaurant disguised as a convenience store.

A PE of 30+ is pretty common for a restaurant in growth mode. So by that standard, CASY might be considered cheap. What do you think of this? Apples to oranges?

Cheers,

Eric
long CASY

2 Likes
8

Hello Eric,
may I ask why are you so focused on their gas profits? If I’m not mistaken, that only accounts for about 25% of their gross profit:

Good question. My premise is that the fuel margins were unusually strong to the point of being unsustainable. I believe that this is verified by management’s projection for FY16 of 16.7c/gal. compared to the 19.3c/gal. achieved in FY15. In the Grocery & Other management projected gross margin flat at 32.1 (the same as it was in FY14 and FY15. Preparedfood and fountain margin was projected at 60.8 compared to 59.7. My thesis is further supported by management saying that it has been difficult to acquire stores because potential sellers want higher prices because fuel margins are unusually strong. Just as management is reluctant to pay higher prices for stores because they believe that industry fuel margins will come down, I am reluctant to chase the price of CASY stock to the upside for I fear that fuel margins will eventually erode, causing growth to slow.

I think the bigger underlying story may be the profitability of the non-gas categories, particularly prepared foods/fountain drinks. I.e., they are sort of a restaurant disguised as a convenience store.

A PE of 30+ is pretty common for a restaurant in growth mode. So by that standard, CASY might be considered cheap. What do you think of this? Apples to oranges?

While the margins are much higher in the non-fuel categories, I am not sure that we have enough data to declare that profitability is better there. Surely you would agree that when CASY’s purchases a store, or renovates a store that much of the capex is going into the non-fuel side of the business. I believe that a deficient fuel set-up that is acquired and must be renovated is paid for from reduced capex of the purchase price whereas the bulk of added capex takes place inside the store. It might be interesting to query IR to see if they would share any data on the profitability of the individual segments. A significant portion of capex above building new stores goes into coolers and equipment for the Food and Beverage segment. I think that you are probably correct that CASY gets a better return from that investment than from fuel, but that is speculation on our part.

While they sell a lot of beer and pizza, I would not classify the company as a restaurant. In my opinion, the company would not prosper by giving up any of its 3 main revenue categories. They have made great progress in developing synergies. Witness the program to give 10 cents a gallon off gas to everyone who simultaneously buys a certain size pizza.

My post was not meant to discourage anyone from maintaining an investment in the stock. It was to point out the difficulty I have in calculating a good entry point. If I were a long term owner, I would not be a seller at this level.

Best regards,

Mike

4 Likes
9

I decided to pass on CASY given I worry about its reliance on its gas stations to drive customer traffic. As EVs emerge, how will CASY’s economics be affected? Note I realize that EV emergence may be a ways off, but this disruptive, and I believe inevitable trend away from ICE to EV concerns me as it relates to CASY. Just my two cents.

Am I alone on this one?

Vic

10

Possible point to consider… CASY is rural. I believe rural areas are likely to be among the last to change over to electric vehicles.

2 Likes
11

Ev’s not going to reduce ICE traffic in a meaningful way in 3-5 years. Tesla’s model 3 not due until 2017 (maybe).

KC Long TSLA and CASY

1 Like
12

EV being common in rural domain - CASY’s customer base is years and years away, meanwhile CASY is doing well here and now and for a couple more years for sure… (Due to reducing gas prices and improving economy)

Nilvest
Just took a small position in CASY… looking to build it soon

13

RE concerns about EV: People go to CASY stores just to pick up food. Of course many do stop for gas and a soda or whatever, but they don’t stop there for gas and then decide to order and wait for a pizza.

Most of their stores are in rural settings where they may one of the few (sometimes only) takeout options available unless you want to drive 30 miles to the next town. For these rural towns, CASY is more important as a restaurant than a gas station, since there is typically at least one other gas station in these small towns.

Doesn’t matter what the vehicle is, people will still make a trip to Casey’s to pick up their order - OR they’ll just have it delivered to them once CASY gets their delivery service up and running across a larger portion of their store base.

I wasn’t able to dig up any info on ROIC broken down by category, but I don’t think it takes too big a leap of faith to say their prepared foods category is highly profitable relative to capex specific to that category or they wouldn’t bother to put a kitchen in these tiny <1k pop towns like they do. It also wouldn’t make sense for them to be rolling out delivery service for their prepared foods if this wasn’t a very important category for them.

I realize it’s conjecture on my part, but I would expect that when gas margins get compressed, that will leave CASY in a position of strength relative to their peers who rely more heavily on gas profits, relatively speaking. That’s when CASY will start finding bargains and buying up stores. Until then, they’ll be content opening new stores and/or renovating/updating existing locations.

The CASY slogan is ‘Famous for Pizza’ after all, not ‘Famous for Gas.’ :slight_smile: Pizza is even part of their website domain name:

http://www.caseysfamouspizza.com/

Cheers,

Eric

5 Likes