Part 8

Murphy USA: Key risks and Murphy’s predicted organic growth

Murphy USA, Inc. (MUSA): Risks and mitigants

Risk Impact Mitigant
Reliance on Walmart for Co-Locations and Discount Program Could Potentially Stunt Future Growth/Opportunities
  • Murphy has a long-term relationship of over ten years with Walmart, further bolstered by an agreement between both companies and a discount program for Walmart shoppers.
  • The company owns roughly 90% of its real estate, often pads near a Walmart supercenter.
  • MUSA has purchased 908 of its locations from Walmart and currently has a signed agreement with Walmart to purchase and build out 200+ more locations.
New Build Program Potential Squeeze on Future CF and Capital Structure Risk.
  • Management has suggested that they have looked at alternative options for their ethanol facilities, which could potentially fund an aggressive new build program.
  • The company’s cost per new store is fairly low at $2.1 million, and can easily be funded through the Company’s FCF and revolver.
Volatility in Gasoline Prices Revenue and Margin Decline
  • Murphy is a low-cost operator and requires only 6.6 cents of gasoline margin for cash breakeven.
  • MUSA has successfully operated in a wide variety of pricing environments—keeping EBITDA positive in tough markets.
Tobacco Merchandise Revenue and Gross Margin Decline
  • Although tobacco consists of 10.8% of merchandise gross profit, we believe a combination of steady demand and Murphy’s lower price points offset this risk.

Conclusion

Murphy USA has a sustainable moat as the low-cost provider of a necessary commodity (gasoline). Yet MUSA’s equity price implies a ~50% increase to conservatively calculated intrinsic value.

Management’s plan to grow intrinsic value is to grow 200 stores over three years financed solely from FCF is reasonable both operationally and financially. The company has separable assets, including their wholly owned ethanol facilities and midstream assets, which could be utilized in resource conversion activities that would increase the upside.

MUSA EBITDA BridgeEnlarge Graph

Further, management is well aligned with shareholders (board holds ~6% of the company and the CEO is targeted to hold shares worth 5x salary). Given the potential future store growth, which should add at minimum $40 million in incremental EBITDA (earnings before interest, tax, appreciation, and amortization) per year and clean underutilized balance sheet (at least one turn or ~360 million of excess debt capacity), the shares could be worth as much as $60+ as the company continues to grow its EBITDA through new stores and return capital to shareholders once its two-year restriction is lifted.

While not a “great business” due to gross margin fluctuations, Murphy is a good business at a very fair price. Buy Murphy USA at current prices to realize a 50%+ gain in 12 to 24 months.

The Market Realist Take

The company estimates an EBITDA of $350 million and revenues of $19.58 billion for FY13. For FY14, the company expects 5.5% growth in revenues to $20.661 billion and an EBITDA of $297 million. According to the company’s website, excluding its locations close to Walmart, it operates 150 Murphy Express locations as stand-alone convenience stores. It expects to grow organically with Walmart on existing and new locations and open 200 more locations, and 40 standalone locations. It partners with Walmart on a fuel discount promotion, and plans to rebrand additional stand-alone sites as Murphy USA and then connect them to the fuel discount program.

The company focuses on low-priced convenience products like gas, tobacco, single-unit snacks and beverages that complement Walmart’s core product offerings. It expects to grow its assortment of other convenience items that will differ from Walmart’s primary products, and also offer low-priced fuel and tobacco for its value-oriented customers. The company said that in order to tackle volatility in gasoline prices, it expects to establish a strong balance sheet of fee-simple assets and appropriate debt structure resilient to inherent fuel price or margin volatility. In the long term, it expects to invest in retail growth throughout margin cycles, and plans to return excess cash from above-cycle profits to shareholders to generate leading total shareholder returns.

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.

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