MUSA, a market outperform stock

What do they do

Murphy USA (MUSA) owns and operates a string of convenience stores and gas stations. Many of their stores are adjacent to Wal-Mart stores.

Management

The CEO, Andrew Clyde, has been the head of the company since its spin off in 2013. He owns about $62 million in stock, so it is safe to say he has a vested interest in the stock going up. In my opinion, the company has been very shareholder friendly under his tenure.

What is good about it?

The company has demonstrated great returns throughout its history. Their 5 year average ROIC is 18%, and ROE is 44%. The company has also been aggressively buying back stock. Its share count has been cut in half in its 10 years as an independent company. As a result, its 10 year stock return is around 600%.

MUSA also has the ability to grow through acquisition. In 2020 they bought Quick stop convenience stores, giving them a foothold in the northeast. It also gave them a quick serve restaurant business, something they had previously lacked. Management plans to expand this service to existing Murphy locations and enhance profitability. The gas station market is fragmented, with lots of individual owners and regional chains. MUSA can use their cash flows to acquire if they so desire.

They have also been investing in their existing stores. They have been upgrading kiosk stores with rehabbed units that allow for more sales.

Having many stores adjacent to Wal-Mart also gives them added traffic, as those stores serve as a destination for shoppers.

Negatives

Like most convenience stores, MUSA has a low operating margin, currently just over 4%. However, they have always operated in this environment with no problem. Their size actually helps them keep margins high for their industry. They are also looking at higher margin add ins, such as food service.

The company carries a lot of debt, about $2.2 billion currently. Much of this debt is tied to real estate they own, as well as financing for the Quick stop purchase. While I don’t feel it is excessive, the debt is worth watching.

Lastly, the EV transition. This will, of course, hurt gas stations. MUSA is trying to add chargers to many stores, but that won’t replace their gas revenue. Personally, I think it will be many years before EVs make gas stations obsolete. Also, Murphy operates mainly in the South and Midwest, 2 areas that have slower EV adoption. While I think this is a concern, I don’t think it is an imminent threat. To counter this, I did 10 year cash flow estimates with no terminal rate, i.e. there is no benefit to the stock value for any earnings beyond 10 years from now.

Valuation

MUSA over earned last year. Extreme gas prices were a huge boon to their earnings. I am counting on the company reverting to closer to their pre-2022 performance.

The company is trading at around 12x forward earnings. Their 5 year average is about 13, so they are probably slightly undervalued, though not much.

The company buys back copious amounts of stock. Pre-covid, the company was buying back 8-9% of their outstanding shares each year. They stepped this up last year, but plan to go back to their pre-covid levels of buybacks going forward. On the last call, their CEO reaffirmed that they were comfortable buying back stock at its current levels.

The company has grown income at about 12% over the last 5 years. I’ll assume they grow income at 10% going forward to discount their 2022 outlier year,

If the company reduces share count by 8% annually, and grows income by 10% annually, it can be assumed that earnings per share can grow around 18% annually. This would be below their 5 year average of 21%. I feel like this is a decent assumption to use as a baseline, and it would dramatically outperform the S&P. I’ll assign this a probability of 40%.

If the company has cash flow issues I’ll assume their buybacks only lower the share count by 4% annually. This would likely create a slowdown in earnings growth too, i’ll assume about 5% annually. This would still be a 9% return, or similar to S&P returns. I’m assigning this a 40% probability.

The bear case is earnings drop dramatically. The stock would underperform. I’ll give this a 20% probability.

That would give this stock 80% chance of equaling or exceeding the market. These probabilities are estimated by me, so they might be way off. I have no position in this stock, but I am strongly considering a position at the current price.