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Baron Funds Comments on Susser Holdings

December 07, 2012 | About:

Susser Holdings (SUSS) is a third generation family-led business that owns and operates more than 550 Stripes convenience stores, primarily located in Texas, which sell gas, goods and fresh food under the Laredo Texas brand. In the quarter, Susser split off its wholesale fuel distribution arm and converted it to an MLP called Susser Petroleum Partners LP (SPP). We bought a big slug of SPP in its recent initial public offering. SPP distributes gasoline and diesel to the Stripes stations under an exclusive fixed price long term agreement, distributes gas to independent dealers at market rates and collects rents from stations that it owns and leases back to operators. SPP went public to raise growth capital to enable the MLP and the parent to rapidly expand.We expect the parent to open up 25-30 new stores per year, and for SPP to buy a good portion of the new stations through sale/lease back transactions. There is a large spread between the lease rate SPP will earn (8%) and its cost of capital (about 2% now), which will increase the MLP's cash flow. We believe the investment in the real estate will be safe in that the leases will be well covered by earnings at the stations, and we believe that the real estate will appreciate in time. SPP will also benefit from profits derived from distributing gas to the new stations. Plus, we expect them to pursue accretive acquisitions of other independent fuel distributors as they have been able to consummate them in the past.

SPP came out of their offering with a well-covered $1.75 dividend which equates to an attractive yield of 8.5%. Though the stock has risen since the offering, it still offers an attractive yield. We think the dividend can increase significantly over the next three years and the yield could decline (multiple will expand), which would result in our investment doubling. After quarter's end, we began building a position in the parent company, which we expect can earn strong returns on its new build program and from its holding of half the units of the MLP and the general partnership interest in SPP.

From Baron Funds third quarter letter.

Rating: 3.6/5 (5 votes)


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