Casey's General Stores: A Field of Dreams?
Josh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Growing up an Iowa boy, I have learned to love Casey's General Stores (NASDAQ: CASY) as they are scattered all across my home state. Having road-tripped to almost every spot in Iowa, it is always a pleasure to stop at various Casey's on my way home. Whether it is Iowa's fame for hosting "Children of the Corn" or being the home state of the fictional Ogden Marsh in "The Crazies," nothing is better than seeing a well lit Casey's in the middle of what would otherwise seem like endless rows of corn. Well, nothing that is except Casey's current situation, which I see as "A Field of Dreams." Alright, I'm sorry for the puns. And the movie references (kind of). Anyways, lets move onto Casey's current situation!
Why the Drop in Stock Price?
After it reported 1st Quarter earnings on September 10, Casey's has watched its stock price slide from $59 to $49 in just one month. While initially being boosted upwards on a slight earnings beat, the market has sent Casey's stock back down with concerns about slowing growth in its Food and Grocery segments.
Even though growth occurred year over year across the Grocery & Merchandise Segment at 2.6% and the Food & Fountain Segment at 10.6%, it was not quite enough to maintain its previous year's growth and appease the market. In the two prior years, the Grocery Segment had grown at a 6.7% and 4.6% pace, while the Prepared Food Segment grew at a 14.3% and a 7.7% clip.
While these may not be blatant misses, the two segments account for almost 80% of Casey's profit and it would have been huge to see the strong growth continue. Throw in the continued pressure on gas margins and Casey's was unable to boost profits dramatically year over year.
Show Me the Appeal!
With all this negativity presented, I would like to be upbeat for a few seconds and explain why Casey's future looks bright, despite its most recent 10-Q:
- Margins in the Grocey & Food Segments were directly in line with fellow competitors at The Pantry (NASDAQ: PTRY) with its Kangaroo Express stores and Susser Holdings (NYSE: SUSS) and its Stripes stores. As a group, margins sit around 33% and 60% for Grocery and Prepared Food, respectively.
- Similarly, Casey's holds gasoline margins in line with Kangaroo Express and Stripes, with $.15 a gallon gap over the last two years. Lower gas prices would lead to higher margins for the group and larger profits.
- Casey's experimented with an additional 150 stores becoming 24 hours, with 26 more being converted to all night in the most recent quarter.
- Added pizza delivery to 50 locations over the last three months, which has lead to huge returns as the Prepared Food Segment has become 30% of Casey's profits. Going from $366 to $500 million in sales over the last two years, the pizza business has exploded, aided by more 24-hour stores.
- Only 80 of Casey's 1,699 stores have a pizza delivery service at the moment, which leaves a long growth runway for the Food Prep Segment, which is possibly Casey's most valuable.
- Gasoline sales have stabilized and Casey's is looking to boost gas sales by 1% in 2013, which is a great sign as they look to get more people through the doors and ordering pizza.
- The company's goal of 4-6% storefront expansion in 2012 seems to be on track as they recently announced a written agreement to buy 22 new stores from Kum & Go.
With all these factors considered, it truly does appear that reasonable storefront growth and strong same store growth could propel Casey's growing profitability for years to come.
Is Now the Time to Buy? A Foolish Outlook
With slight headwinds present in their slowing growth rates, I believe Casey's has been oversold as they have a lot to show in their Prepared Food and Grocery Segments. With the development of new 24-hour stores and pizza delivery, Casey's has a strong opportunity to boost their margin and EPS over the long haul. Considering their reduction in shares from 51 million in 2010 to 38 million currently and a new $.165 dividend that yields 1.3%, it is clear to see that Casey's can generate returns for its shareholders.
Considering Stripes' earnings inconsistency, with quality profits only being realized the last two years and Kangaroo Express' Gross Margin dropping to 1.4% in its TTM, I believe slow and steady Casey's is the best pick of the three. Having grown EPS almost every year (YOY) in the last decade, Casey's has shown its ability to be consistent with earnings, despite various movements in gas prices and even a recession. Finally, with 5 Year PEG's of 1.99 and 1.56 for The Pantry and Susser respectively, I believe the cost of growth is simply too high to buy in, as they have struggled to profit consistently from their top line growth.
Having seen revenues grow at a 13% clip yearly over the last decade, I believe Casey's current P/E of 16.6, FP/E of 13.9, and P/CF of 8 offer a tremendous opportunity to buy a company with a great brand. Seeing historical P/E's coming in around the 17-21 mark, Casey's Forward P/E of 13.9 offers longterm investors a great spot to jump in. 5+ year greenthumb on CAPS and a future position holder in my portfolio if I can get it at these prices.
Fool blogger Josh Kohn-Lindquist does not own any of companies mentioned in this entry, long or short. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.