Equity research: Murphy USA, Inc. (Part 7 of 8)
Murphy USA, Inc. (MUSA): Intrinsic valuation
Free cash flow to the firm (or FCFF) is one method used to determine the intrinsic value for all three cases we saw in the previous part of this series. The company’s terminal value was calculated using both the perpetuity growth and EBITDA (earnings before interest, tax, appreciation, and amortization) exit multiple methods.
Catalysts to value realization
|Share Buybacks/Dividends|| |
|Growth StrategyExecution|| |
|Attractive Valuation|| |
|Coverage/Inclusion into Mid Cap funds|| |
Replacement cost valuation
Importantly, the estimated replacement value does not ascribe any additional value to the company’s midstream assets or ethanol refineries (one refinery was purchased for ~92.0 million).
A relative valuation analysis was completed using peers within the convenience retail industry. There are five comparable, publicly traded companies in the US and Canada whose primary or sole business involves operating independent convenience stores: Susser Holdings Corporation, Casey’s General Stores, Alimentation Couche-Tard, The Pantry, Inc, TravelCenters of America, and CST Brands, Inc. (another recent spinoff).
All of the companies represent solid peers for the company besides The Pantry, Inc., which is a relatively small operator that has struggled, due to its smaller scale and high degree of financial leverage. Importantly, the average EV/EBITDA for the sector trades at roughly 8.8x.
The Market Realist Take
MUSA’s peers have a positive outlook for the industry going forward. According to Susser Holdings (SUSS), whose stores operate under the Stripes brand, it plans to concentrate on the growing Hispanic population, who frequent C-stores most. It said in a September presentation that its focus will be on higher-margin food and beverage rather than cigarettes and fuel. It plans to pursue growth via acquisitions of wholesalers and supply contracts.
Another peer, Pantry (PTRY), said in its recent presentation that it plans to remodel 10% of its store base each year, set up more quick-service restaurants (QSRs), and make selective acquisitions within its geographic footprint. Casey’s General Stores (CASY) saw strong 1Q 2014 results, with revenue up 13.2% to $2114.7 million due to increased sales of gasoline. It expects to expand via acquisition of stores, and increase same-store sales of gasoline, prepared food (pizza), grocery, and other merchandise for FY14.
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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