Murphy USA, Inc. (MUSA)
Murphy USA, Inc. (“Murphy” or MUSA) is a leading convenience store and gas station operation in the Southern and Midwest US (5% market share in their geographic area). Murphy is directly intertwined with Walmart, as the vast majority of Murphy gas stations are located directly adjacent to a Walmart. Similar to Walmart, with respect to pricing, Murphy is a price leader compared to most gas stations and compensates by driving significantly more volume than comparable stores.
In 2012, the company derived 78.3% of revenue from fuel sales, 11.3% of sales from merchandise (primarily tobacco products), and the remaining 10.3% from fuel excise taxes (direct pass-through to the government at no margin).
Spun out from its $11.5 billion market cap E&P, Murphy Oil, Murphy USA began trading August 29, 2013, and is priced at 6.8x TTM EBITDA and 9.5x TTM EPS. Current pricing is below both a conservatively estimated DCF value of ~$60 per share (as we’ll see) as well as estimated replacement value of $2.6 billion (~$42 per share as shown on page 16) for tangible asset value (i.e. no attributed value to the Walmart relationship).
Why invest in MUSA?
The following attributes make Murphy USA an attractive long-term investment at current prices:
- Low operating cost model: Murphy is a low-cost operator focused on volume versus in-store sales. This strategy is evident with Murphy’s cash break even at a 6.6 cent margin per gallon of gasoline and the average size of Murphy’s stores, which are significantly smaller than those of their peers (280 square feet to 1,200 square feet) and require on average ~$25 thousand per year in maintenance capex. Plus, the company is able to source fuel at attractive prices compared to their competitors, as Murphy has access to terminals and has a shipper status on pipelines.
- Leading market position: Murphy is one of the largest C-Store operators with an estimated ~5% market share by volume in their geographic markets. Market share helps with scale, as the company can purchase merchandise in bigger quantities versus the mom and pop c-store operator (62.9% of total C-Stores according to the NACS) and source fuel efficiently, as smaller operators generally have to utilize third-party distributors.
- Spin-off from larger parent should lead to mis-pricing: The spinoff of Murphy is bound to create mis-pricing, given that the current parent is situated within the S&P 500. Forced selling has created an opportunity, with the business trading below its conservatively estimated replacement value.
- Solid financial profile: The company is modestly levered at close with 1.8x Debt to LTM EBITDA and EBITDA/Interest coverage of 9.5x. The company has consistently maintained profitability, with EBITDA growing from $127.0 thousand to $360.0 thousand from 2009 to LTM (last twelve months) 2013. Plus, the company generates solid returns on invested capital for low margined business, in excess of 15%.
- Attractive valuation: At the current price of ~$39 per share, MUSA trades below its conservatively estimated C-Store replacement value (excluding valuable midstream assets and two ethanol facilities) of $2.15 thousand per unit ($41 per share) and roughly two turns below that of its competitors, which equates to a base case target price of ~$58 or 52% upside at current prices.
- Growth opportunities: The company has significant growth opportunities, as it recently entered into an agreement with Walmart to build an additional 200 stores near or on Walmart locations.
The company is dramatically undervalued given its modest valuation, spin-off dynamics, solid market share in a fragmented market, and economic moat as a low-cost provider of commodity products. At current prices, the company offers conservative upside potential of 30%+ and upside as high as 60%+.
The Market Realist Take
Murphy Oil’s (MUR) 2Q 2013 10K filing stated that its refining and marketing operations generated income of $72.2 million in the 2013 second quarter compared to income of $80.5 million in the same quarter of 2012. The division had earnings from continuing operations of $97.5 million in the first six months of 2013 compared to earnings of $76.3 million in the same 2012 period. The 2013 period included stronger financial results in the US compared to a year ago based on better ethanol margins and higher values realized on ethanol renewable identification numbers (RINs) credits sold.
Industry experts believe that consumers in the US are becoming more health-conscious, leading to a decline in the sale of cigarettes, the largest source of profit for convenience stores. So more convenience store companies—like Casey’s General Stores (CASY) and The Pantry, Inc (PTRY)—are collaborating with food retailers to provide healthy and fresh food that will help boost profitability and revenue. Despite a slowdown in the US economy and a fall in the consumer confidence index (to 79.7 in September 2013), convenience stores have seen an increase on the back of a growth in the overall retail industry and rising oil prices. Plus, consumers are taking advantage of quick and low-cost shopping at convenience stores, which is a positive factor for the companies operating these stores. A strong balance sheet coupled with other factors (like the partnership with Walmart, small-store format, low-cost operations, and cheap convenience goods) are expected to be positive catalysts for Murphy USA.
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.