Murphy USA Inc. (MUSA, Financial) recently showed up on the five-year low list on this site. I wanted to take a look to see if the company merits further research at current levels. The company markets motor fuel products and convenience merchandise through a chain of 1,200 stores in 23 states. Murphy USA stations are typically located near a Walmart store, and Murphy Express stores are standalone stations. Murphy is based in El Dorado, Ark., and has been in business since 1996.
The company was a unit of Murphy Oil until 2013 when it was spun off with Murphy Oil shareholders receiving one share of Murphy USA for each four shares owned of Murphy Oil. The company sold its North Dakota ethanol production facility in December 2013, making it a retail marketing operation exclusively. Murphy’s current market cap of $1.95 billion puts it squarely in small-cap territory.
The primary attraction and growth opportunity for the company is its relationship to Walmart. More than 1,000 of the 1,203 stores are located on prime sites close to Walmart stores. Murphy added 18 stores in the fourth quarter of 2013. The company has an agreement to build another 200 stores at Walmart locations over the next few years.
The primary risks for the company are the dependence on Walmart for the core business. Barriers to entry are low. In addition, the company is not vertically integrated like some competitors and must rely on third-party suppliers for product. They face growing competition from companies with similar marketing strategies that affiliate with discount club stores and hypermarkets.
The company took on $650 million in new debt in the separation from Murphy Oil. The sale of the Hankinson ethanol plant in the fourth quarter brought in $173 million, strengthening the company’s finances and increasing focus on the core business.
At a recent price of $40.95, Murphy sells at about 12.2X times trailing earnings. EV/EBITDA is 6.1x. The company fell short of estimates in the most recent quarter, earning $0.63 vs. the consensus estimate of $0.67. Consensus earnings for the fiscal year are $2.44.
Given the relatively attractive valuation and looking at the recent earnings performance, I would consider the stock a hold at current levels. I would like to see the company execute on its growth strategy and show it can hit earnings, or trade to a lower valuation before committing capital.
