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Bull of the Day: Casey's General Stores

David Borun

Let’s face it, it’s hard to get excited about the prospect of investing in gas stations. It’s a place to fuel up your vehicle, grab snacks and beverages and possibly buy a few other convenience items, cigarettes, lottery tickets, etc. These are things millions of Americans buy every single day, but stiff competition and typically low margins make it a fairly boring industry for equity investors.

Don’t make the mistake of ignoring Casey’s General Stores (CASY), one of the best managed convenience store chains in the nation that has uniquely positioned itself for significant growth, even in a plain-vanilla industry.

Based in Iowa and operating in 16 Midwestern states, the key to Casey’s success has been sound financial discipline, a vertical integration of distribution and their own line of freshly prepared food items that keep loyal customers coming back for more.

If you live near a major metropolitan area, there’s a good chance you pass several gas stations and convenience stores each day - with little to differentiate them from each other. The typical customer tends to simply stop at the location that’s closest when they need to fill up with little loyalty to a specific brand.

In contrast, Casey’s operates 57% of its more than 2,100 stores in towns with populations of 5,000 or less people. Only 17% of stores are in towns with a population greater than 20,000.

For many Casey’s customers, it’s the only place in a reasonable radius to pick up those daily staples. In addition to self-serve gasoline, Casey’s offers a wide selection of house branded food items like pizza, donuts and sandwiches. With these types of items, it’s much easier to engender customer loyalty.

When people know they can get a favorite food or beverage item in an attractive, clean and friendly environment, they come back often. It becomes part of the daily routine.

Casey’s has used extensive marketing research to create a loyalty program “Fleet” card that’s tailored to the needs of customers who drive as part of their job, which increases both gasoline and food sales and also provides the company with valuable data about customer preferences to guide future product offerings.

Producing and distributing a large portion of the items they sell allows Casey’s to enjoy better than average gross margins and avoid transportation and supply bottlenecks. The company owns and operates two state-of-the-art distribution facilities – one in Iowa and one in Indiana – each with a 500-mile distribution radius that covers the entire range of states in which stores are located. Casey’s transports 90% of food and convenience items themselves and 75% of fuel.

Thanks to pricing power and tight cost control, Casey’s gross margin on gasoline – traditionally a low-margin product – is an industry leading 20.3 cents/gallon.

As is common with Heartland businesses that grew from small family operations, Casey’s exhibits a great deal of financial discipline. Owning the majority of their assets allows them to tightly control costs, growing strategically while still returning capital to shareholders.

A 62% earnings beat in the most recent quarter has Casey’s shares rallying significantly, delivering more than twice the return of the S&P 500 so far in 2019, not including the modest but steady 0.75% dividend yield.

Steadily rising earnings estimates earn Casey’s a Zacks Rank #1 (Strong Buy) as well as a coveted spot on the Zacks Focus list.

Finally, in an uncertain investing environment, Casey’s is naturally resistant to trade issues, interest rates and even the threat of a US recession. Selling locally sourced goods in the US Midwest and delivering through their own distribution system insulates the company from the global financial shocks that plague many other companies.

In a world full of more exciting concepts, Casey’s General Stores represents an opportunity to own a steadily growing US company with a solid management structure and strong balance sheet that’s definitely built to last.

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