Equity research: Murphy USA, Inc. PART 3 OF 8
Murphy USA: Murphy’s business model stands out from competitors
Murphy USA, Inc. (MUSA): Differentiation
Murphy differentiates itself from its competitors primarily through:
- Small-format offerings leading to higher sales per square foot (average footprint for comps is 3,000 square feet): MUSA sells roughly nine times the merchandise per years per square foot compared to comps ($4,744 versus $547).
- Volume-focused sales model: MUSA’s monthly fuel gallons sold per store per month is 277 thousand, which is more than twice the industry average of 124 fuel gallons per store per month. The reason is that MUSA’s locations adjacent to a Walmart (including many Walmart Super Centers).
- Low operating costs: MUSA operates at three-quarters the industry average cost (typically $30 thousand per month operating cost per store compared to ~$40 thousand for comps). Murphy achieves this by running stores with only one or two employees at any one time, using one distributor (McLane) for 80% of their non-gas SKUs, and maintaining smaller stores that require less maintenance.
- Highly scalable business model, which is relatively inexpensive to build out.
Murphy plans to continue its long-term growth strategy by:
- Building 200 new stores adjacent to Walmart Super Centers. Funding will be from FCF and potentially an increase in revolving credit or ethanol asset sales.
- Rolling out 1,200 square feet stores going forward, which should increase both sales per store and gross profit per store due to increased volumes of high margin beverage and other non-tobacco products.
- Increased midstream participation, which lowers fuel sourcing costs for the retail business as the company has shipper status on the Colony pipeline and currently owns seven terminals.
- Dispose of non-core assets such as the ethanol facilities and the non-core Tampa terminal.
- Strategic management focus: Management is aligned with the results of their unit, which was previously a smaller portion of Murphy. Entrepreneurial juices should be released with the transaction.
- Appropriately capitalized and solid access to capital: With the transaction, MUSA is conservatively levered at 1.8x Debt to EBITDA, with the ability to take on additional debt capacity or lever its massive real estate portfolio for a return of capital or other growth opportunities.
- Pursue growth opportunities: With its own board of directors and capital structure, Murphy USA will be able to pursue a growth and capital strategy that makes sense for its own business, not Murphy Oil.
- Unlock value: Convenience store comps trade at five times to nine times EBITDA versus the current Murphy Oil multiple of 3.9x 2013E EBITDA (32% -111% premium).
Mr. Andrew Clyde will serve as president and CEO of Murphy USA. Mr. Clyde previously was employed at Booz & Company in its global energy practice. He joined the firm in 1993 and was elected partner in 2000, holding leadership roles as North American Energy Practice Leader and Dallas office Managing Partner and serving on the firm’s board nominating committee. The CEO will hold stock worth roughly five times his annual salary.
Mindy K. West serves as CFO and treasurer of Murphy. Ms. West joined Murphy Oil in 1996 and has held positions in Accounting, Employee Benefits, Planning and Investor Relations. In 2007, she was promoted to vice president and treasurer for Murphy Oil.
MUSA’s board is aligned with shareholders, as they collectively hold ~6% of the outstanding stock. Additionally, since the spin-off, management and a couple board members purchased ~$150 thousand to $200 thousand worth of shares each.
Murphy owns 90% of its retail locations, which enables the company to have lower operating costs versus its peers (elimination of rental expense). The Company paid $9.4 million in fiscal year 2012 to lease roughly ~10% of its store base and other assets.
A back-of-the-envelope calculation with ~50% of the stores leased equates to “normalized” rent expense and TTM 2013 EBITDA of ~$47MM or $322MM (1.9% margin), respectively. Further, the ownership of real estate allows for the management to have flexible financing options going forward (i.e. sales-leaseback or ABL financing). The excess cash from a potential transaction involving real estate could be used to finance growth capex or return cash to shareholders
The Market Realist Take
The company said in its 10K filing that it increased its refining and marketing capital expenditures for the six months ended June 2013 to $105.2 million, compared to $55.4 million for the same period the prior year. This rise is primarily due to higher spending on land acquired for future stations to be built adjacent to Walmart stores in the US.
Murphy’s competitors in the convenience store space include Susser Holdings Corporation (SUSS), Casey’s General Stores (CASY), Alimentation Couche-Tard (ATD), The Pantry, Inc. (PTRY), TravelCenters of America (TA), and CST Brands, Inc. (CST)—spun off from Valero (VLO) in April.