Unraveling the Valero Spin-off

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Valero Energy (NYSE: VLO) spun off its retail business into a new company called CST Brands (NYSE: CST) in May 2013. The refining giant decided to spin off its retail business in an attempt to unlock value for its shareholders. Overall, CST Brands is an intriguing investment because it operates gas stations, which makes the company both a retail and energy play.

Fuel retailer

CST Brands has 1,032 and 848 retail sites in the U.S. and Canada, respectively. Cars are crucial to the modern world so the demand for gasoline will always be there. The demand for gasoline also drives the merchandise part of the business because people are already there as a result of purchasing gasoline.

While evaluating new companies is usually tough, CST Brands has been operating as a part of Valero. Thus, there is a lot of financial information available that investors can dig through to evaluate the company. In its most recent quarter ending on March 31, CST Brands reported net income of $21 million. This is an improvement on the $14 million net income in the same quarter of the previous year. In the trailing twelve months, or TTM, CST Brands earned $216 million.


However, as is the case with all investments, consistency is important. Companies usually have years that are outliers so looking at earnings over a span of a few years is important. Since the demand for gasoline is almost recession proof, CST Brands should have consistent earnings. Check out the following table.

<table> <tbody> <tr> <td> </td> <td>2012</td> <td>2011</td> <td>2010</td> <td>2009</td> </tr> <tr> <td>Net Income (millions $)</td> <td>210</td> <td>214</td> <td>193</td> <td>146</td> </tr> </tbody> </table>

From 2009 to 2012, CST Brands posted an average net income of $191 million. In terms of earnings per share, or EPS, CST Brands posted an average EPS of $2.53 over that time period. Using a modest PE ratio of 10, this translates into a value of $25.30 per share.

However, this estimate ignores the company’s tangible book value per share or TBVPS. It is a good idea to include TBVPS in an analysis because it is value already owned by the company. Tangible book value is the same as book value except it ignores intangible assets like patents which can be difficult to value. At the end of March, CST Brands had a tangible book value per share of $17.18. Taking this into account, the company is worth about $42 per share.


CST Brands faces stiff competition from other gas stations. A big threat to CST Brands is other large gasoline chains like Royal Dutch Shell (NYSE: RDS-A), which sold the largest total amount of gasoline in the U.S. in 2009. Shell dwarfs CST Brands with close to 14,000 Shell branded gas stations in the U.S.

In addition, Shell and other vertically integrated companies have a lot more assets at their disposal because they are vertically integrated. They can absorb lower margins through other business segments like refining. CST Brands lost this type of advantage after it split off of Valero.

However, location and the price of gas is really what drive customers to go to certain gas stations. CST Brands has been profitable so location should not be an issue. Also merchandise and other services actually make up about 50% of CST Brands’ gross profits. Thus, as long as the gas is competitively priced CST Brands should remain profitable. The worst case scenario would be a 50% drop in profits which would put CST Brands’ value at about $29 per share.

Long-term risk

It should be noted that the biggest long-term risk to gas stations is that the earth might be running out of crude oil. If all the oil is used up or oil becomes a negative net energy to drill, gasoline powered cars will likely become obsolete. People would no longer need to stop at gas stations to buy gasoline so sales of other merchandise would likely drop as well.

While this is a legitimate long-term risk, gas stations would probably survive. Vehicles are essential to the modern world so even in a world without oil another type of fuel or energy carrier would likely be used to power vehicles. Since gas stations are already well positioned infrastructure for local service of vehicles, they would probably be modified to continue providing refueling services. Overall, CST Brands faces legitimate risks, but the company looks like a solid investment.

Alvin Gonzales owns shares of Valero Energy and CST Brands. The Motley Fool owns shares of CST Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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