Free Annual Reports
How Much Is Casey's Really Worth?
Convenience store operator Casey's General Stores (Nasdaq:CASY) issued a press release on September 7 that included a lengthy letter to shareholders explaining its rejection of Alimentation Couche-Tard's (TSX:ATD.A, TSX:ATD.B) $38.50 a share takeover offer. According to Casey's board, a strategic buyer (7-Eleven) has emerged willing to pay $40 a share. This too has been rejected as undervaluing the company's assets. In the letter to shareholders, it suggests that analysts believe its intrinsic value is $45 without even taking into consideration a takeover premium. This tells me that Casey's has no idea what its stock is worth and is simply playing the parties against each other to extract the highest price possible. It's a good strategy if it works, but what happens if both walk away? The stock price craters.
IN PICTURES: What Is Your Risk Tolerance?
A Bird in the Hand
Last April, when the first offer ($36 per share) was announced, Casey's stock jumped 23.8% to $38.91. As of September 3, its stock price was at the very same level as five months earlier. However, as I write this article, Casey's letter to shareholders has been positively received by investors and its stock price has risen above $40. Whether it stays there is another matter.
Casey's management is using share repurchases and increased store acquisitions to drive shareholder returns. It sounds to me like management is throwing anything they can overboard in order to prevent a takeover and the inevitable loss of their jobs. When I wrote about it back in April, I indicated that Couche-Tard went public with its offer because it knew from previous conversations with Casey's management that negotiations would be strained at best. I reasoned that it had a fiduciary responsibility to negotiate with Couche-Tard; this doesn't appear to be happening. Instead, Casey's is using an unnamed third party to produce a higher bid. Shareholders might want to consider that just five months earlier, the stock was trading below $32. Don't get greedy. (For more on share repurchases, see A Breakdown Of Stock Buybacks.)
Casey's Real Worth
There is no correct answer. Sure, analysts can float an intrinsic value of $45, but it's guesswork. What we do know is that two identifiable parties (Couche-Tard and 7-Eleven) are willing to pay $38.50 and $40 a share, respectively, so I'll use $40 as a starting point. In August, Casey's borrowed $569 million in senior unsecured notes at 5.22% to buy up 13.2 million shares at $38 each. The share repurchase lowers the total outstanding shares to 38 million, which will raise the expected earnings in future quarters. I'm puzzled why it didn't do this back in April prior to the takeover announcement when its shares were below $32. Management has wasted over $80 million in shareholder cash (difference in share price plus legal fees fighting the takeover) to remain independent. If a deal of some kind doesn't materialize, they'll be lawsuits aplenty.
The Past
A 10-year look back at Casey's P/E shows it was highest in 2004 when its stock traded for 27 times earnings. This past year was its best for earnings at $117 million. Using the revised number of shares outstanding, earnings per share in 2010 are $3.08. Multiply this by the 2004 P/E of 27 and you get $83.16. Using the old share count, it's $61.83. I'll use this as my ceiling. The lowest multiple for its P/E came in 2008 when it was 13.9. This puts its share value at $31.83, exactly where its stock traded back in April. The true value is somewhere in between.
Bottom Line
When you look at Casey's return on retained earnings (how it invests its past profits), they're actually better than Couche-Tard's. My previous article praised the business, but not the way in which it was handling the overtures made by the Canadian retailer. Now that it's increased its debt by a factor of five, I'm even more skeptical. It's an awful cost to shareholders just to remain independent. I have very little reason to believe the $40 bid from 7-Eleven will amount to anything. It appears to me that these are stall tactics meant to solicit a higher bid from Couche-Tard. I'd think twice. (For related reading, take a look at Corporate Takeover Defense: A Shareholder's Perspective.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: What Is Your Risk Tolerance?
A Bird in the Hand
Last April, when the first offer ($36 per share) was announced, Casey's stock jumped 23.8% to $38.91. As of September 3, its stock price was at the very same level as five months earlier. However, as I write this article, Casey's letter to shareholders has been positively received by investors and its stock price has risen above $40. Whether it stays there is another matter.
Casey's management is using share repurchases and increased store acquisitions to drive shareholder returns. It sounds to me like management is throwing anything they can overboard in order to prevent a takeover and the inevitable loss of their jobs. When I wrote about it back in April, I indicated that Couche-Tard went public with its offer because it knew from previous conversations with Casey's management that negotiations would be strained at best. I reasoned that it had a fiduciary responsibility to negotiate with Couche-Tard; this doesn't appear to be happening. Instead, Casey's is using an unnamed third party to produce a higher bid. Shareholders might want to consider that just five months earlier, the stock was trading below $32. Don't get greedy. (For more on share repurchases, see A Breakdown Of Stock Buybacks.)
There is no correct answer. Sure, analysts can float an intrinsic value of $45, but it's guesswork. What we do know is that two identifiable parties (Couche-Tard and 7-Eleven) are willing to pay $38.50 and $40 a share, respectively, so I'll use $40 as a starting point. In August, Casey's borrowed $569 million in senior unsecured notes at 5.22% to buy up 13.2 million shares at $38 each. The share repurchase lowers the total outstanding shares to 38 million, which will raise the expected earnings in future quarters. I'm puzzled why it didn't do this back in April prior to the takeover announcement when its shares were below $32. Management has wasted over $80 million in shareholder cash (difference in share price plus legal fees fighting the takeover) to remain independent. If a deal of some kind doesn't materialize, they'll be lawsuits aplenty.
|
Company |
5-Year Average P/E |
|
Weis Markets (NYSE:WMK) |
18.8 |
|
Casey\'s General Stores (Nasdaq:CASY) |
18.0 |
|
Alimentation Couche-Tard (TSX:ATD.A) |
17.7 |
|
Ruddick (NYSE:RDK) |
16.1 |
|
Supervalu (NYSE:SVU) |
15.4 |
A 10-year look back at Casey's P/E shows it was highest in 2004 when its stock traded for 27 times earnings. This past year was its best for earnings at $117 million. Using the revised number of shares outstanding, earnings per share in 2010 are $3.08. Multiply this by the 2004 P/E of 27 and you get $83.16. Using the old share count, it's $61.83. I'll use this as my ceiling. The lowest multiple for its P/E came in 2008 when it was 13.9. This puts its share value at $31.83, exactly where its stock traded back in April. The true value is somewhere in between.
Bottom Line
When you look at Casey's return on retained earnings (how it invests its past profits), they're actually better than Couche-Tard's. My previous article praised the business, but not the way in which it was handling the overtures made by the Canadian retailer. Now that it's increased its debt by a factor of five, I'm even more skeptical. It's an awful cost to shareholders just to remain independent. I have very little reason to believe the $40 bid from 7-Eleven will amount to anything. It appears to me that these are stall tactics meant to solicit a higher bid from Couche-Tard. I'd think twice. (For related reading, take a look at Corporate Takeover Defense: A Shareholder's Perspective.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
Free Annual Reports
