Loading Up On Convenience Store Stocks

It doesn't seem logical that convenience stores would do well during tough economic times. After all, relative to prices at grocery stores, convenience stores aren't cheap. But as the name implies, these companies offer patrons the convenience of getting snacks, cigarettes, and beer without dealing with the time and effort required to get them somewhere else. Even a cash-strapped consumer is likely to walk into a convenience store to purchase a single-serve beverage or other quick fix item. In fact, a recent article in Barron's illustrates precisely why this is so.

Good Businesses
Often anchored by gas stations, convenience stores are solid generators of cash flow. While the margins in gas are nothing to talk about, margins on the retail side can be quite lucrative, especially when you can sell a 20-ounce bottle of Coke for $1.50, even when a six-pack of the same bottles will cost you $4 at a leading grocery chain. Indeed, recent acquisition activity in the sector is alerting investors to this fact. Casey's General Stores (Nasdaq:CASY) is now a target of Canada's Alimentation Couche-Tard, which recently announced a $36 per share offer to acquire the company.

It's not hard to figure out why Casey's is being pursued. Its fiscal 2010 EPS for the year ended April 30, 2010, was $2.30, a 36% lift from fiscal 2009. And while gasoline sales provide a stable stream of revenue - albeit at thin margins - grocery and merchandise margins were more than 30%, while prepared food margins were nearly 65%. Same store sales across both categories were also up. (For related reading, check out Analyzing Retail Stocks.)

Look Inside the Pantry
With the strong performance of Casey's and Alimentation's strong interest in the business, shares in the The Pantry (Nasdaq:PTRY) are worth investigating. This convenience store operator operates nearly 1,700 chains in 11 states. The company has a market cap of $320 million compared to $1.9 billion for Casey's. Analysts expect The Pantry to earn $1.54 in its next fiscal year, which would give the company a forward P/E of under 10 at today's price of $14. For comparison's sake, the deal for Casey's, which operates over 1,500 stores in Iowa, values Casey's at nearly 16 times earnings, but that could be low, as Casey's management is citing a low price as its reason for being against the deal.

The Pantry also trades for 1.1 times book value versus 2.2 for Casey's. Casey's deserves to trade at a premium due the strong profitability of its stores and its strong balance sheet. Casey's has virtually no net debt while The Pantry is heavily leveraged. Nevertheless, the company looks like an attractive turnaround play.

Susser Holdings (Nasdaq:SUSS) is an even smaller convenience store with 525 stores in Texas, Oklahoma and Louisiana. It trades at 0.8 of book value but has nearly $300 million in net debt against a market cap of $180 million. But The Pantry has one additional catalyst worth noting: It has a new CEO whose previous post was as a top executive at Coca-Cola Enterprises (NYSE:CCE). Having the marketing expertise that Coke is known for should lend tremendous value to The Pantry in the coming years.

Bottom Line
With stable businesses backed by fuel, cigarette and food sales, convenience stores offer the kind of stable cash flows that many investors or potential acquirers seek. With the recent interest in Casey's General Stores, shares in the Pantry may be the next best thing. (For related reading, check out The Value Investor's Handbook)

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