Pizza purists may scoff at a gas-station pie, but Americans eat 75 million slices from Casey’s General Stores each year, making it the fifth-largest pizza chain in the U.S. And the convenience-store company has plenty more to recommend it to investors beyond its ability to make a mean Margherita.
Investors have long been aware of the company’s appeal. Casey’s (ticker: CASY), which owns and operates more than 2,200 stores across 16 states, had outperformed the S&P 500 index for years, thanks to its double-digit earnings and revenue growth and expanding footprint. Then, Covid-19 hit, and the growth understandably slowed, as did the stock gains. Casey’s underperformed the S&P 500 by one percentage point over the past year.
The pandemic, however, will end. And Casey’s growth is likely to reaccelerate as customers return from lockdown and the company scoops up smaller rivals. That makes Casey’s something that has become rare in retail—a reliable, compounding growth story in a sector that has been buffeted by disruption. A recent pullback offers an opportunity to get in ahead of what could be another strong cycle.
“In retail in the U.S., it’s tough to find sustainable visible growth because of disruption and economic impacts, but Casey’s is relatively immune,” says Markus Hansen, portfolio manager at Vontobel Asset Management’s Quality Growth Boutique.
“Until Amazon can deliver you a can of Coke or a bag of candy in 15 minutes, people are still going to pop down to the C store.”
Casey’s General Stores, with a market value of nearly $7 billion, might not be a household name, but perhaps it should be. It’s the fourth-largest convenience-store chain in the U.S., behind privately held 7-Eleven, Circle K owner Alimentation Couche-Tard (ATD.B.Canada), and Speedway, soon to be absorbed by 7-Eleven owner Seven & i Holdings (3382.Japan).
In many small towns, Casey’s is the only resource for groceries or hot meals, and that has proved particularly profitable: Margins on inside-store sales, which exclude fuel, were 41% in Casey’s most recent quarter, up from 39.6% in the prior period.
A well-oiled self-distribution network for both fuel and merchandise means that even though Casey’s has lower traffic levels than rivals in more-urban markets, it delivers similar gross profits and return on capital. Casey’s network also means that competitors can’t muscle in on its turf without facing significantly higher supply-chain costs.
The coronavirus hasn’t been kind to Casey’s, however. In its fiscal fourth quarter of 2020, which ended in April, Casey’s revenue fell nearly 17%, to $1.81 billion, as the first wave of Covid-19 pummeled the U.S. Sales rose to more than $2 billion in the subsequent two quarters, but still fell by double digits from the year-ago period.
Casey’s already has started to recover. Despite the hit to sales, the company is expected to grow earnings per share by 12.6% from a year ago to $7.99 this fiscal year, and sales are projected to return to year-over-year growth, with an 18.4% rise to $2.15 billion in the fiscal fourth quarter of 2021, which ends in April.
Casey’s should benefit from a general economic reopening, as more people get back on the road, eat out, and buy meals on the go. About a third of the company’s food sales stem from commuters dropping in for lunch, a pattern that should slowly improve toward prepandemic levels after the U.S. achieves mass vaccination.
Even during the crisis, the company has been rapidly expanding its loyalty program, adding about half a million new members in its most recent quarter alone—a good sign for growth, and another reason that analysts expect sales to climb above prepandemic levels of just shy of $10 billion by the full fiscal-year 2022, which ends in April of next year.
“There are opportunities, as people drive more and have discovered the [company’s] prepared food, for Casey’s to continue to grow that,” says Julie Biel, portfolio manager at Kayne Anderson Rudnick. “For an investor [focused on] near-term earnings growth, it could be interesting.”
Covid-19 hasn’t stopped Casey’s from expanding. The C-store industry is fragmented, with leading players still commanding only mid-single digit percentages of the total market. Casey’s has been purchasing smaller competitors to expand its number of stores—the company previously indicated that it thinks it can double its store count—and build economies of scale for long-term growth. In November, Casey’s announced that it would acquire Bucky’s Convenience Stores as part of a $580 million deal, the biggest in its history and one that analysts applauded from a strategic and financial perspective.
That growth profile makes the stock’s valuation all the more attractive. Although it changes hands at 24 times forward earnings, slightly above its five-year average of 23 times, it’s worth noting that the Bucky’s transaction, which is pending, hasn’t been incorporated into many analyst models yet. That will expand the earnings portion of the price/earnings ratio.
“Casey’s wants to be in the top quintile of all consumer-growth stories,” says Stephens analyst Ben Bienvenu. “If they can deliver on that, there’s a lot of room for valuation expansion.” Bienvenu has a $210 price target on Casey stock, 13% above a recent $186.
In addition, Casey’s trades at just over 11 times enterprise value to earnings before interest, taxes, depreciation, and amortization, or Ebitda. As Hansen notes, chains have fetched at least 12 times that figure in recent mergers and acquisitions. “If there were to be a deal for Casey’s, it would not be for less than 15 times,” says Hansen. “The stock isn’t expensive for the price you’re paying.”
Time to stock up.
Write to Teresa Rivas at teresa.rivas@barrons.com
Growth Is
In Store
Recovering from a Covid setback, Casey’s sales are expected
to bounce
18.4%
in the company’s fiscal fourth quarter, which ends in April.
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