Warren Buffett (Trades, Portfolio) would probably like this company. He and we could easily understand it.
Casey’s General Stores Inc. (CASY, Financial) sells gasoline, groceries, pizzas, doughnuts and more in small towns in 14 states in the Midwest. From its headquarters in Iowa, the company operates nearly 2,000 stores that fit between convenience-store and supermarket size. And, Casey’s prefers to place these stores in towns with populations of less than 5,000.
Fittingly, you can find Casey’s on the current Buffett-Munger screener:
It meets at least three of the criteria for this screener with predictable earnings growth, a moat and by being fairly valued. It also has debt, which is not so popular with Buffett and his followers.
In this article, we’ll take an in-depth look at the company and try to figure out if the debt issue should or should not keep this otherwise strong company off our short lists.
History
- 1959: Don Lamberti leases a country store from his father in Des Moines, Iowa, and remodels it into a convenience store.
- 1968: Lamberti buys the Square Deal Oil Company, a service station, and builds it into a combination gas bar and convenience store. This becomes the first Casey’s.
- 1980: First prepared food: doughnuts.
- 1983: Publicly listed on NASDAQ.
- 1985: Introduces pizzas made in store.
- 2008: Adds sub sandwiches to prepared foods.
History based on information provided at the company website and Wikpedia.org.
Casey’s business
The stores carry “a broad selection of food (including freshly prepared foods such as pizza, doughnuts and sandwiches), beverages, tobacco products, health and beauty aids, automotive products and other nonfood items. In addition, all but two Casey’s stores offer fuel for sale on a self-service basis.” (Unless otherwise noted, information in this section is based on Casey’s 10-K for 2015)
Based on the success of one of the early stores, in the late 1960s and early 1970s, founder Don Lamberti decided the company would concentrate on smaller towns. In 2015, its store profile looked like this:
- Fewer than 5,000 population: 57%.
- 5,000 to 20,000: 25%.
- More than 20,000 population: 18%.
It outlines its philosophy this way:
“We seek to meet the needs of residents of smaller towns by combining features of both general store and convenience store operations. Smaller communities often are not served by national-chain convenience stores. We have succeeded at operating Casey’s General Stores in smaller towns by offering, at competitive prices, a broader selection of products than does a typical convenience store. We have also succeeded in meeting the needs of residents in larger communities with these offerings.”
Almost all of its revenue comes from three lines: fuel/gasoline, grocery and general merchandise and prepared foods (doughnuts, pizza, submarine sandwiches):
As this excerpt from the 10-K indicates:
- Fuel brings in the biggest share of revenue but the smallest share of gross profit.
- Grocery and other merchandise brings in the biggest share of gross profit.
- Prepared food brings in the second-largest gross profit but on a much smaller share of revenue.
Gross margins ranged from 7% on fuel to 61% on prepared foods. Because of the margins on the latter, the company has expanded this line and now serves many other prepared foods including breakfast croissants and hamburgers.
The moat
While any company could take a run at operating convenience stores in Casey’s territory, the incumbent has a number of critical advantages:
- Intimate knowledge of small town tastes and preferences.
- Infrastructure to service its network of stores.
- Knowledge of and experience with product mixes including its proprietary prepared foods.
Competition
Although Casey’s has a moat, it still operates in what it calls a highly competitive environment. In smaller towns, that competition comes from local grocery and convenience stores as well as prepared food outlets, restaurants and expanded fuel stations with grocery and food items.
Larger communities mean competing with both local and national food and drug retailers, expanded fuel stations, local supermarkets and drug stores, discount stores that sell food and regular convenience stores.
Named competitors in the larger areas include Quik Trip, Kwik Trip, Kum & Go and other regional chains.
Growth
Over the past decade, revenue growth was generally strong but has faded in the past two fiscal years:
This table from the 10-K shows the growth of same store sales, by category, in the past fiscal year:
Earnings per share (EPS) have grown quite consistently (Casey’s enjoys a 4-Star predictability rating):
Looking ahead, the 10-K lists several areas where the company has opportunities to grow:
- Expansion of prepared foods is one pillar in Casey’s growth strategy. In addition to a ready market, serving customers who come in for fuel or other products, this line has strong margins. At the end of fiscal 2015, 330 stores also offered pizza delivery.
- Expanded store hours: Over the past few years it has shifted more than 700 stores to 24-hour service to capture buying that would otherwise pass it by.
- Acquisitions and build-outs also play a part in growth of the company; it reports buying 36 stores in fiscal 2015 and that it will continue looking for new acquisition opportunities. In its annual report for 2015, the company reports building 45 new stores and remodeling 257 others.
Analysts followed by Yahoo! Finance expect to see continued growth in earnings:
Comments: Casey’s management does a good job of operating a chain of some 2,000 convenience and general stores. It has several strategies that allow it to be more than just another thin-margin grocery retailer, and it has growth opportunities in multiple areas. We would expect that growth to be as profitable as it has been in the past.
Ownership
Six of the investment gurus followed by GuruFocus own stock in Casey’s General Stores; the biggest of them is RS Investment Management (Trades, Portfolio) with 362,523 shares. The second- and third-largest holders are Jim Simons (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio).
Institutional shareholders, have faith; pension funds, mutual funds and other institutions own 87.21% of the company.
Another 7.61% belongs to company insiders. According to GuruFocus, Lamberti owns just over half of the insider holdings, 1,851,926 shares.
Shorts also have a presence in Casey’s, with 4.37% of the float.
Comments: Institutional and insiders account for almost 95% of Casey's shares, so it seems a very safe bet for investors with long time horizons.
By the numbers
Comments: Casey's closed above its 52-week high July 26, but whether the bulls can get higher highs remains to be seen. This is a $5 billion company that generates an ROE of better than 22%, pays a small dividend (with a small payout ratio as well) and did not buy back any stock in the past fiscal year.
Financial strength
Casey’s General Stores receives middling marks for both financial strength and growth and profitability:
Why does this company, with a Piotroski F-Score of 7, which is quite respectable, get such a low score for financial strength? A look at the red icons above the F-Score shows us why: debt and particularly how the company’s current debt status compares to its status in the past. Here’s a chart that illustrates:
Can it handle the debt? Here’s a chart of its free cash flow (FCF) over the past decade:
Here’s a look at its revenue (also note the negative revenue growth in the Profitability and Growth column above):
This chart shows Casey’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization):
This is its EPS (Earnings Per Share):
Comments: Judging by the revenue, EBITDA and EPS results, Casey’s is making the most of the debt it has taken on with good growth for each of those metrics.
Valuation
Casey’s General Stores currently (at closing July 27) sports a PEG ratio of 1.36, which puts it in the middle of the fair value range.
The PEG ratio came from investing guru Peter Lynch, one of the great mutual fund managers of all time. He divided a company’s P/E by its earnings growth averaged over the past five years to get a measure that would give him a fuller, more robust picture than using the P/E alone. When the calculation yields a number below 1, the stock is considered undervalued, between 1 and 2 fair valued and above 2 considered overvalued. Casey's has a PEG of 1.36.
For another perspective on that, let’s look at a chart that follows the share price (in green) and the earnings per share (in blue). As we see, there’s a pretty consistent relationship between the two lines. Most recently, it seems the price line has gone up faster than the EPS line, which would suggest a slight overvaluation:
Let’s now look at the Discounted Cash Flow Fair Value calculator, which builds a price based on the company’s prospects over the next 20 years:
It, too, finds the current price to be slightly overvalued.
Given Casey’s 4-Star predictability rating, it seems fairly likely it will continue to generate good earnings growth in coming years.
Comments: While the PEG ratio suggests a fair valuation, there are also indications that Csey's may be slightly overvalued, 5% in the case of the DCF Fair Value calculator. Such a difference makes no significant difference so let’s just say the stock is in fair value territory.
Conclusion
I have no idea how many towns of fewer than 5,000 people exist in the Midwest and adjacent states. However, I suspect there are a lot of them, a lot not currently served by a Casey’s. And I’m quite sure there are not many other operators, whether independent or chain, that could go into those towns and set up stores that satisfy both residents and investors from afar.
Casey’s General Stores has room to grow, strategies to grow profitably and deep-pocketed investors ready to finance that growth. As noted, 95% of Casey's shares have been taken up by institutional investors and insiders.
That confidence by the so-called smart money and inside money suggests Casey’s deserves a place on the short lists of investors looking for above-average, long-term gains.
Disclosure: I do not own shares in any of the companies referenced in this article, nor do I expect to buy any in the foreseeable future.
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