Fund Management added a second, related holding in CST Common (CST
). With nearly two thousand locations throughout the U.S. and Canada (operating primarily under the Corner Store ® banner), CST Brands is the second-largest independent retailer of motor fuels and convenience merchandise in all of North America. CST came onto our radar coincident with its recent spin-off (May 1, 2013) from Valero Energy Corporation, one of the world's largest refining companies. As a result of only recently becoming an independent entity, the company's shares appeared to be temporarily "orphaned," with little sell-side sponsorship, for example, and no readily accessible financial data. CST enjoys a steady, cash-generative business in part because of its relatively broad geographic exposure, with operations spread across nine states in the U.S. (predominantly in the Southwest) and Canada (predominantly Quebec and Ontario). Encouragingly, CST's single largest geographic exposure is the state of Texas (at about a third of CST's store base), giving CST the most exposure to the state's fast-growing economy (based on store count) of all independent convenience store operators. New incentives for management and an ability to allocate capital accordingly will likely help to accelerate corporate growth since former parent Valero appeared to view CST as simply an outlet for motor fuel distribution rather than supporting the potential within its store base.
In addition to growth in the store base,CST also appears particularly well-positioned to improve its margins over the coming years. We see margin improvement coming from multiple sources, including 1) new larger-format stores that are more profitable than legacy stores, 2) increased focus on food merchandise sales which are much more profitable than fuel and cigarette sales and 3) improved technology systems to better manage inventory and costs (currently upgrading its SAP system). In addition to these initiatives, we expect CST management to make acquisitions in an industry that remains fragmented and characterized by smaller, less efficient operators. The Fund's current cost basis equates to an undemanding (in our view) eight percent free cash flow yield.
From Third Avenue Management
’s third quarter 2013 letter to shareholders