Casey’s Justifying Its Independence

By Ryan C. Fuhrmann | March 12, 2012 AAA

Rural convenience store operator Casey's General Stores (Nasdaq:CASY) has put together an impressive string of annual sales and profit gains. Last year, this caught the attention of a key rival that wanted to acquire Casey's, but it was able to successfully fend off the hostile bid. Based off the strong recent stock gains, shareholders are happy that Casey's has remained independent.

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Third Quarter Recap
Total sales jumped 14.9% to $1.6 billion. Casey's breaks its sales into three primary categories. The largest is gasoline sales, which account for the bulk of the total top line, but are the least profitable. Its estimate of same store gallons sold fell 2.4% to fall below its goals of 1%. Margins of 13.6 cents slightly exceeded its stated goal of 13.5 cents. So far this year, gas sales have accounted for nearly 73% of total sales. The sale of grocery and related items has accounted for close to 20% of sales and is much more profitable with profit margins above 30%. Comps in this category rose 6.3% to exceed internal targets.

The final category is food and fountain drinks, and though it accounts for the least amount of sales at around 10%, is by far the most profitable for Casey's. The average margin exceeds 60% and same-store sales jumped 12.6% during the quarter, to blow away management's goals of 7.7%. It also detailed that 20% of the store base now operates 24 hours per day, leaving more time for those who fill up their tanks to venture inside the store and purchase its high-margin food and drink items.

Pre-tax income advanced 22.6% to $26.2 million. Lower interest expense helped push profitability higher and other expenses, including the cost of sales and operating expenses, also rose at a slower rate than sales. Reported net earnings increased 29.7% to $16.7 million, or 43 cents per diluted share. Backing out charges in last year's quarter due to spending to fend off a hostile takeover bid, management estimated that year-over-year third quarter earnings improved more than 16%. (To know more about income statements, read Understanding The Income Statement.)

Casey's didn't offer specific sales or earnings guidance, but has an outstanding goal to boost its store count between 4 and 6% annually. For the year, it plans to add 65 stores, replace 11 existing ones and remodel 25 other locations. As of the end of the last fiscal year, Casey's operated 1,637 stores throughout 11 Midwestern states. Most locations are in Iowa, Missouri and Illinois.

For the full year, analysts project sales growth of 23%, total sales of nearly $7 billion and earnings of $3.11 per share.

The Bottom Line
The strong recent operating trends have pushed Casey's stock up to its highs over the past year. At the current price just above $50 per share, the forward P/E is getting up there at 15, but still reasonable given management's ambitious growth targets. Over the past five years, sales are up nearly 10% annually while profits are up more than 13%.

Casey's stock has followed suit over the past five years and has more than doubled over this period. This far exceeds the performance of rivals that include the Pantry (Nasdaq:PTRY) and Susser Holdings Corporation (Nasdaq:SUSS). Grocery giant Kroger (NYSE:KR) also operates a large number of locations that sell gas, but its results are dominated by its grocery stores.

A key component to Casey's competitive advantage is its focus on rural locations that are more insulated from competition. This has served it, and general retailer Tractor Supply Company (Nasdaq:TSCO), well over the years; Tractor Supply's stock has more than tripled over the past five years. Both show little sign of slowing from their currently impressive expansion pace. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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