I grew up in rural Iowa, a couple of miles outside a town with a population of roughly 800. Our town had (and still has) only one gas station — Casey’s General Store.
In reality though, it was much more than a gas station. Casey’s was the place to go for fresh doughnuts in the morning, pizza on a Friday night and a cold Coke in the summer. It was the “only game in town.” And was inescapably part of our (and every other local family’s) lives.
Alas, it wasn’t until this past summer when I was visiting my family that it struck me, as an investor, how strong that gas station’s presence is in the community. There is no competing gas station within four miles in any direction, and even those are few and far between. It has an almost literal, physical moat which, while not insurmountable, definitely aids its business. In addition, both the pizza and doughnut businesses had an even stronger distance separating them from their nearest competitor.
A couple of weeks ago I decided to look into Casey’s more thoroughly, and upon reading their most recent 10-K found that:
- Focusing on rural American communities has been their strategy for more than 45 years.
- 60% (1,020) of their nearly 1,700 stores are located in communities of less than 5,000 residents.
- 85% of their stores are in communities with less than 20,000 residents.
The idea of one company using a lot of little moats as the foundation to their operational strength intrigued me. So, I decided to buckle down and do an analysis of the company.
Casey’s was founded by a man named Don Lamberti, who in 1959 leased a store from his father in Des Moines, Iowa. In 1967, Lamberti’s friend and business partner, Kurvin C. Fish, recommended that Lamberti buy a gas station in Boone, Iowa. Don named that store “Casey’s” by using Kurvin C. Fish’s initials — KC.
Lamberti’s third store was built from scratch in Waukee, Iowa, a small town with a population of about 1,500. This turned out to be the best Casey’s yet, and he decided to establish future stores in communities with a population of 5,000 or less.
Casey’s continued to grow and in 1983 completed its IPO. In 1984, Casey’s began marketing its “Made from Scratch” pizza and began to focus on providing quality prepared food in addition to gas and groceries.
Casey’s now (as of April 2012) has 1,699 stores in 13 Midwestern states, and just this year expanded into Tennessee and Kentucky. The heart of its operations, however, lies in Iowa (477 stores), Illinois (405 stores) and Missouri (305 stores.) Those three states alone account for nearly 70% of all Casey’s General Stores.
Casey’s management divides the company into three primary operating units: a) gasoline b) grocery and other c) prepared food and fountain. Before talking about each segment specifically, I believe it’s beneficial to take a brief look at what an individual store looks like by the numbers. It will give greater relevance to a discussion of each business segment as a whole:
| Average Sales/Gross Profit |
of a Casey's General Store
|Retail inside sales||1,015,000 (30%)||958,000 (31%)||928,000 (29%)||856,000 (26%)||778,000 (28%)|
|Retail gasoline sales||2,482,000 (73%)||2,112,000 (69%)||2,301,000 (71%)||2,449,000 (74%)||1,985,000 (72%)|
|Gasoline gross profit||132,000 (25%)||119,000 (23%)||108,000 (22%)||115,000 (25%)||84,000 (22%)|
|Inside items gross profit||404,000 (75%)||389,000 (77%)||373,000 (78%)||340,000 (75%)||302,000 (78%)|
Note three key items in the above chart:
1. Most of the revenues come from gasoline, and most of the profits come from inside items (which include both grocery and prepared food segments).
2. Same-store sales have grown quite well during the past five years, which happen to have been a tough five years for the economy as a whole.
3. The average store has nearly doubled in operating income since 2007.
*Note. The disparity in the 2011 sales averages (30% + 73%) is because I took the numbers directly from Casey’s 2011 10-K, where the averages also didn’t match.
Selling gasoline is a tough business. It really is. It is an extremely competitive, commodity-like business that faces a multitude of outside pressures. Gas station owners are at the mercy of the fickle price of oil, political unrest thousands of miles away, environmental regulations, government policy, not to mention the difficulty of having to match the competitor who is right across the street. In addition to those frustrations, credit card fees have been increasing greatly the last few years, and gas station owners have had to be paying more and more of their margin to the credit card companies.
Amidst these difficulties, gas station owners have three things that work in their favor, though:
-People need to buy gasoline. For a lot of people it’s just as necessary and perhaps even less flexible than an electric bill.
-If gas station owners can get people to come in to the store after purchasing gas, they can sell them goods which offer higher margins and less macroeconomic uncertainty.
-Finally, if a gas station is in a good location — either on a high-traffic area or in an area without a lot of competition — it can produce gasoline profits that are, at worst, reliably average.
In short, gas station owners are always looking for a way to utilize the commodity-like nature of gasoline in order to make steady, reliable profits on higher-margin goods. If a gas station cannot do this, they will be unable to compete long-term.
There are a vast number of different methods to do this, and gas station owners can get pretty creative. Many gas stations offer car washes. A lot of gas stations offer freshly made food. Other owners have been co-branding their sites with well-known restaurants in order to get a more steady income stream and more customers in the station. Still other gas stations market lottery tickets or cigarettes as tools to get customers in the store.
Casey’s, like everyone else in its industry, seeks to utilize its gasoline operations to bring people into its stores, with their primary emphasis being Casey’s food. While its gasoline operations are significant, the primary profit drivers at Casey’s General Stores come from inside the store, not outside. In 2011, 74% of the gross profit came from inside the store.
That said, let’s look at a chart I put together from their 2007-2011 10-Ks of their gasoline operations. Note the average gross profit margin per gallon and average number of gallons sold per store in particular.
|Gasoline Segment Details||2011||2010||2009||2008||2007|
|Number of gallons sold (in thousands)||1,394,456||1,283,479||1,242,269||1,214,547||1,193,554|
|Revenue (in thousands)||$ 3,998,702||$ 3,177,489||$ 3,323,616||$ 3,558,107||$ 2,881,054|
|Gross Profit (in thousands)||$ 212,038||$ 178,176||$ 159,851||$ 169,308||$ 124,094|
|Average retail price per gallon||$ 2.87||$ 2.48||$ 2.68||$ 2.93||$ 2.41|
|Average gross profit margin per gallon||$ 0.152||$ 0.139||$ 0.129||$ 0.139||$ 0.104|
|Average number of gallons sold per store||868,790||853,725||859,114||835,948||821,057|
As you can see, despite the large macroeconomic uncertainties affecting the price of oil during the last several years, Casey’s gasoline operations provide a fairly steady stream of gasoline revenues and profits.
Gasoline margins per gallon and same-store gallon growth compare favorably or in-line with competitors (The Pantry, Alimentation Couche-Tard, Susser Holdings), but the actual volume number of gallons per store is lower than most competitors. I believe this is primarily due to Casey’s locations being more rural. There is naturally less same-store volume than in a big city.
Basically, the strength of Casey’s gasoline operations is not in getting large volume, but in steady and reliable volume with decent growth and good margins per gallon. The gasoline operations are doing reliably well in a tough industry. The key for Casey’s, though, as mentioned above, is that their gasoline operations bring people inside the store to add profit to the next two categories…
Grocery and Other Merchandise
Here is a simple table of revenue/gross profit for this category:
|Grocery & Other (in thousands)||2011||2010||2009||2008||2007||2006||2005||2004|
The grocery segment at Casey’s is a steady performer and has done reliably well for years. Some of the high-margin goods sold in this category include beverages (sports drinks/soft drinks), beer and cigarettes. In all three of these categories, customers at Casey’s have been “trading down” to less expensive brands of products in the last few years due to economic difficulties, but that is not an unusual problem for a retailer in the U.S. right now.
Cigarettes are the biggest risk in this category, as increased taxation has hurt sales, and cigarette retailers are at the mercy of government regulations and availability of rebates from tobacco companies.
Casey’s has, in the past couple of years, been remodeling and building stores with a new store design to promote the sale of cold beverages, adding a large amount of coolers in the new design. The new store design has thus far been deemed a success by management, and I believe it will help this category going forward.
Prepared Food and Fountain
If Casey’s were merely a convenience store with well-located gas stations and good grocery stores, I would probably avoid the stock. Grocery retailing and gas are some of the most competitive areas one can invest in, and it’s extremely difficult to carve out a moat. However, Casey’s Prepared Food and Fountain category is a game-changer. Here is the basic table of the segment’s growth in the past eight years:
| Prepared Food/Fountain |
Rarely (if ever) does a convenience store produce its own brand of food with such efficiency, growth and brand strength. Casey’s has been making quality food since the 1980s, and the brand has continued to develop. This is an extremely valuable segment and a major differentiator for Casey’s.
In its stores, Casey’s sells pizza, sandwiches, fritters, chicken tenders, breakfast sandwiches, breakfast pizza, hash-browns, burgers and potato cheese bites. Some of the new restaurants now offer made-to-order sub sandwiches, and management has continued to develop that program. In addition to pizza, Casey’s sells doughnuts, as well as fountain drinks — both soda and coffee. By number of locations, Casey’s is actually a top-ten retailer of doughnuts and pizza in the U.S.
Think about this for a second. Casey’s is, in a sense, a restaurant disguised as a gas station.
And, it’s a restaurant that can and does dominate in small towns where other restaurant chains are unable to go. Because it provides gasoline, a commodity that everyone needs, Casey’s is able to be the Starbucks, Tim Horton’s, Dunkin’ Donuts, McDonald’s and Pizza Hut to every small town where it has a store. Those major chains cannot open a new store in a town of 1,000 people. If the people in a small town want a morning cup of coffee with a quality doughnut or a breakfast sandwich, they can go to Casey’s on their way to work, and buy gas at the same place!
Who is going to want to compete with Casey’s in the rural Midwest? I have no idea. I sure wouldn’t. Can similar companies compete with Casey’s in the bigger Midwestern cities? Yes. Can I think of any Casey’s competitor that can match its brand strength in the rural Midwest? No.
As a side note, unlike many competitors, Casey’s does not co-brand its gas stations with nationally known restaurants. Only Casey’s prepared food is sold at Casey’s restaurants, making the Casey’s brand much more far-reaching than merely the name of a gas station company. Casey’s food has a reputation, and people will go there just to get the food, which is fairly unique in the convenience store industry. Most convenience store pizza is just something you pick up on impulse while standing in line to pay for your Coke, but people will go to Casey’s on purpose just to eat their pizza or to get a dozen donuts to take to work.
The biggest risk in this category is most undoubtedly commodity costs, especially cheese, but also meat, wheat, corn and coffee. Casey’s has been able to raise prices to help minimize the impact of commodity costs, but is unable to raise prices to eliminate the impact altogether.
Plans for future growth include continuing to experiment with a pizza delivery program begun in April 2011, adding more flavor profiles to the coffee bar and continuing to develop the sub-sandwich category. It will indeed be interesting to see how Casey’s prepared food segment grows.
Alimentation Couche-Tard Hostile Takeover Attempt
It’s impossible to do an analysis of Casey’s without discussing the hostile takeover attempt by major convenience-store operator Alimentation Couche-Tard in 2010. It has had a huge effect on Casey’s finances, costing millions of dollars in operating expenses and leading to a major recapitalization plan.
It is definitely a long story, but here’s a short timeline of the key events regarding the takeover attempt:
October 6, 2009: The CEOs of Casey’s (Mr. Myers) and Couche-Tard (Mr. Bouchard) had a phone conversation about credit card fees and how they are impacting the convenience store industry. Mr. Bouchard suggested a strategic alliance between Casey’s and Couche-Tard, but Mr. Myers said that Casey’s was happy with their current strategic plan and not interested.
November 16: Mr. Bouchard talked with Mr. Myers again, suggesting a strategic alliance, and Mr. Myers advised Mr. Bouchard to submit a proposal in writing to the board.
March 9, 2010: Mr. Bouchard sent a letter to Mr. Myers and the Casey’s board of directors offering to purchase all of Casey’s shares for $36 a share, which at the time was implied a EV/EBIDTA multiple of 7.4x and EV/store multiple of $1.2 million
March 29: After several board meetings and discussions with advisers, Mr. Myers sent a letter to Mr. Bouchard stating that the board unanimously decided to reject the acquisition offer.
March 30: Mr. Bouchard sent a prompt reply back, reiterating the same offer, only threatening to take the offer directly to the shareholders.
April 7: Mr. Myers sent a reply to Mr. Bouchard, reiterating the Casey’s board’s decision to reject the offer.
April 9: Couche-Tard made public the letter from Mr. Bouchard to Mr. Myers with the $36 a share offer. Casey’s responded back with a press release as to why they were recommending rejection of the offer.
(Prior to April 9, Couche-Tard had acquired 1,975,362 shares of Casey’s stealthily, which was approximately 3.9% of the company. Shortly after they made their offer public on April 9, they sold 1,975,000 of the shares that day at an average price of $38.43 for a pre-tax gain of $13.9 million. The post-tax gain of $11.4 million was nearly 4% of their entire net income for fiscal year 2010.)
June 2: Couche-Tard commenced the offer and announced its intentions to acquire nine seats on Casey’s board of directors.
July 22: Couche-Tard increased its offer to $36.75 in cash.
July 28: Casey’s announced a $500 million recapitalization plan to repurchase shares at prices between $38 and $40 a share, with the goal of purchasing close to 25% of current outstanding shares.
September 1: Couche-Tard increased its offer to $38.50 in cash.
September 7: Casey’s announced that it was in preliminary talks with 7-Eleven, disclosing the price being considered — $40 a share.
September 23: Casey’s annual meeting. All directors nominated by Couche-Tard were rejected, receiving less than 10% of the votes. Casey’s escapes the hostile takeover attempt.
I am no expert on hostile takeovers and learned a lot in studying the events I just outlined. However, I believe there are a few key takeaways from the entire nearly year-long episode:
1. Alimentation Couche-Tard would have gotten a bargain if their plan would have gone through. They offered to purchase Casey’s after Casey’s earnings had been hit hard by the toughest Midwestern winter in years. It was a wise time to seek to purchase Casey’s, and Couche-Tard gave it a shot.
2. On a practical level, it is useful to have an idea of the metrics used to value Casey’s by Couche-Tard — the EV/EBIDTA multiple and the average price per store. It would make sense to at least consider those metrics when valuing Casey’s and other similar businesses.
3. Casey’s management was either a) too stubborn to sell the business and be forced from their positions of power or b) extremely confident in the future of their company and don’t want to sell it for less than it’s worth. I believe it’s the latter.
Casey’s is a business with room to grow, a quality business model and a position of great strength. It would have been a mistake, in my opinion, to sell out to Alimentation Couche-Tard. The benefits largely were on the side of Couche-Tard, with Casey’s shareholders, at a sale price of $38.50 a share, only receiving a 22% premium from the last closing price on April 8 — the day before the offer became public. As we saw from studying their business segments, Casey’s is more than merely a collection of gas stations.
As everyone knows, the retail industry has been going through massive consolidation for decades, but one segment that is still widely fragmented is the convenience store industry. As of May 2012, there were an estimated total of 148,126 convenience stores in the U.S., but only 59,434, or 40.1%, of those stores were owned by one of the top 100 convenience store operators. There is major room for growth as I believe the industry will eventually consolidate.
Casey’s is extremely well positioned for growth, and there are few things standing in their way. Their business model is wonderful, their same-store sales continue to grow, and as they add more stores, higher economies of scale will aid them in negotiating with suppliers, etc. They have pursued acquisitions with restraint in the past, waiting for the right prices, and I would hope they would continue to be price-conscious in the future.
Even better for Casey’s is their proven success with stores in small communities. Many of the fragmented “Mom and Pop” stores are in rural areas, unlike gas station chains with major presences in big cities. Casey’s is one of the strongest (if not the strongest) convenience store chain in rural America.
Before the Alimentation Couche-Tard takeover attempt, Casey’s had minimal long-term debt. However, during the takeover attempt, Casey’s fought back by enacting a recapitalization plan, as sometimes happens in such situations. Casey’s borrowed $500 million dollars to buy back shares, which more than doubled their total liabilities and more than quadrupled their long-term debt. Casey’s is a steady business with decent cash flow, so the debt is not crippling, but from a financial strength standpoint, I would prefer to not have added the $500 million in debt.
(That said, it is worth noting that when borrowing the $500 million, Casey’s was able to take advantage of lower interest rates and borrow at a much lower rate than they had been in the past.)
Casey’s is doing fine, and I don’t anticipate any financial problems, largely because of their fairly steady cash flows. Their current ratio is right around 1, their pay-out ratio is 20% (decently high for a convenience store operator) and, aside from the unusual actions to prevent a takeover, from everything I have read it seems to be a conservative company.
When considering the financial strength of Casey’s, one important point is that they own practically all the land on which their stores are resting. Many similar companies lease locations, but Casey’s management has always sought to purchase the land and reduce their dependency on outside forces. In its 2011 10-K, Casey’s states that the value of its land at cost is $348 million, and that does not include acquisitions that have taken place since that time. I am sure the land is more valuable than its stated cost but am not sure how best to value that, so I’ll settle on adding a bit of safety in Casey’s assets.
(Even with its additional debt, Casey’s is safer than its more comparable rival in size — The Pantry. Also as far as financial position relative to number of stores, The Pantry is the most similar competitor. The Pantry has not done near as well as Casey’s in the past few years and is almost drowning in debt and the corresponding interest payments.)
An investor’s opinion of Casey’s management will be based largely on how she feels management handled the Couche-Tard takeover attempt. If one believes that they acted in the best interests of the shareholders long-term (which, as of now, definitely seems to be the case), then they did a great job defending the company.
In contrast, one could make a case (as Mr. Bouchard at Couche-Tard most definitely tried to do) that Casey’s management sought to put defensive measures in place that would make it more expensive for anyone to acquire Casey’s, such as golden parachute packages for key executives and a “poison put” feature on the bonds Casey’s issued to purchase back their stock which would penalize any future acquirer.
Simply put, though, there are a few key factors that I look at in Casey’s management:
1. Pay. Their key executive team is paid less than any of their other primary competitors.
2. Stock options. While executives and board members are granted options, the awards are reasonable, not excessive.
3. Achieving the goals they set. Casey’s management sets goals every year, and they meet the majority of them. In the rare instance that they don't, it is usually due to circumstances far outside of their control.
While I do wish executives at Casey’s would hold more stock long term, there is no evidence that the management will stop making decisions that facilitate growth in the business and focus on their strengths. The company remains focused on their goals, and that in turn deserves to reflect well upon management.
The biggest risk to Casey’s investors is the lack of a margin of safety at current prices. That’s kind of a cop-out answer, though, so here are what I see as the biggest operational risks facing Casey’s:
- Competitiveness of its industry. It’s fairly intuitive, but the convenience store industry is intensely competitive. This risk is assuaged in part by Casey’s focus on rural locations, but it still is a definite risk.
- Volatility of petroleum costs and dependence on the oil industry in general.
- Commodity costs, especially the cost of cheese and coffee. Casey’s primary food item is pizza, and higher prices of cheese can crimp profitability per pizza seriously.
- Credit card fees. Credit card fees are based on total transaction amounts, so higher gas prices result in higher fees paid to the credit card companies. Credit card fees in fiscal year 2011 were $65 million, which was more than 10% of company operating expenses.
- Bad weather. I know from personal experience that Midwestern winters can be hard, and bad weather can definitely impact operating performance. Weather had a significant impact on earnings in fiscal year 2010.
- A lukewarm economy. Many customers “trade down” to lower-margin items and drive less in a difficult economy. That said, Casey’s tends to weather the storm better than most, as small-town traffic tends to be more reliable than transit traffic or traffic in tourist areas.
- Debt. This is a risk not relevant a few years ago, but the recapitalization plan added a significant amount of debt to Casey’s balance sheet. As discussed above, I don’t think it is a major risk, but worth keeping an eye on.
For a valuation using multiples, a decent place to start would be to look at the primary valuation metric that Couche-Tard used — EV/EBITDA — and get a rough estimate from that. So, if Casey’s EV/EBITDA ratio were 7.5, current value would be right around $44 a share. If the EV/EBITDA ratio equals 8, value would be $48.22. Currently, prices are nearly at an EV/EBITDA ratio of 9, which is much higher than Couche-Tard’s suggested multiple of 7.2 to 7.4.
$44 a share would be a fairly conservative price. With current TTM earnings of $3.04, that implies a P/E of 14.5. $48.22 implies a P/E of 15.8.
In attempting to value its business via its assets, I researched various gas station acquisitions over the last few years for several different companies. Practically all purchases run between an average of $1 million-$1.3 million, with a few reaching higher on rare occasions ($2 million). Those purchases include purchases of both independent gas stations as well as blocks of gas stations owned by a single entity. Regardless, though, they rarely include purchase of a store brand to actually use, but instead are merely the acquirers buying the physical gas stations in order to rebrand them. (Additionally, some of those purchases do not include actually purchasing the site land in its entirety.)
To fully value Casey’s, one would have to take into account the value of full control of the business, all of the roughly 1,700 stores, the land the stores are on, the Casey’s warehouse, Casey’s corporate headquarters, and the Casey’s brand. If one were to suggest an average store price of $1.45 million (which were to include everything — brands/warehouse/headquarters/land), subtract long-term debt, and add in cash, that would equal a value per share of $48.25, which is remarkably similar to the EV/EBITDA of 8. A more realistic average store price of $1.6 million (again, including everything, subtracting debt, adding cash) would equal a value per share of $55 per share.
Most other valuations I have calculated are in that same range — $48-$55, with the midpoint being $51.50. My personal buy price is 20% less than that price — at $41.20 a share.
Casey’s is one of the best convenience store operators in the country and is focused on both its rural locations and prepared food offerings. Casey’s has a bright future ahead of it, but at current prices that future has already been priced in. For now, I will wait for better values.