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Tickers in this Article: CASY, PTRY, PEP, KO, GIS
Convenience store operator Casey's General Stores (Nasdaq:CASY) reported third-quarter earnings on Monday that disappointed investors. The passing of takeover interest and a down overall market have also sent the shares on a downward trajectory, all of which have made them much more appealing to current and prospective investors.

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Third-Quarter Recap
Total sales jumped 23.3% to $1.4 billion as the company opened six new stores and acquired 64 locations. Casey's reports sales in three main categories, the largest of which is low-margin gasoline sales. It states goals for each category and has annual ambitions to increase gasoline comparable sales by 1% annually. First quarter comps rose 3.5% and margins per gallon of gasoline rose to 13.9 cents per gallon, which was also ahead of target. Casey's has sold over 1 million gallons of gas so far in its fiscal year.

Grocery and related merchandise comps improved 5.8% in the fourth quarter but fell short of management's 6% annual goal. Prepared food and fountain comps grew 10.5% to beat the 8% goal, though profits came in below expectations. This is Casey's most profitable category and it reported gross margins of 62.1% for far this year. The stores also focus on "nationally advertised brands" such as those offered by Coca Cola (NYSE:KO), Pepsi (NYSE:PEP) and General Mills (NYSE:GIS). In contrast, gas accounts for the highest proportion of sales (nearly 70%), but it only posted a 5.6% gross margin. Grocery weighed in at a 32.3% margin to account for the second highest proportion of sales at 22%, with prepared food accounting for the rest of the total top line.

Reported net income fell 25.3% to $12.9 million, but it included "approximately $27.4 million in expenses pertaining to the company's recapitalization plan completed in the second quarter, as well as the unsolicited hostile offer and related actions by Alimentation Couche-Tard Inc., of which $1.7 million was recorded in the third quarter." Reported earnings were 34 cents per diluted share, but would have been 37 cents when backing out the above one-time items. This came in below analyst projections and sent the shares down sharply after the earnings release. Management also cited higher operating expenses and lower margins given food price inflation.

Outlook
Casey's didn't provide specific guidance, but said it plans on opening 20 new stores during the year and replacing 15 locations. Analysts expect full-year sales growth of nearly 18% and total sales of $5.5 billion. Earnings projections call for $2.69 in earnings per share, or year-over-year growth of approximately 17%.

Takeover Talk
After much takeover speculation from Couche-Tard and Japan-based 7-Eleven, Casey's, like independent rival the Pantry (Nasdaq:PTRY), should remain independent for the foreseeable future. Takeover talk continues to be mentioned, but a lack of concrete evidence has sent the shares back to earth. The earnings miss and a bearish market environment haven't helped lately either.

Bottom Line
Currently, Casey's trades at a very reasonable forward earnings valuation of 11.5. Two investment drawbacks are that it didn't provide cash flow details during its quarterly release and debt is now a hefty 64% of total capitalization after the move to take on debt and defend against a takeover. But cash flow trends have been strong, as has the overall growth track record in recent years. A favorable valuation, continued appealing growth prospects, and takeover potential mean shareholders could make out well over the next few years. (For related reading, also take a look at Food Stocks to Avoid in 2011.)

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