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Bull of the Day: Casey's General Stores (CASY)

David Borun

Today’s Bull of the Day will offer a glimpse into the practices of professional money managers. We’re not talking about hedge funds, but rather the huge institutions that manage billions or even hundreds of billions of dollars for pensions, municipalities, foundations, university endowments and other giant entities.

This is the investment realm where the managers don’t care much about a flashy name or an exciting story. They care about returns; consistent, market-beating returns. Although the objectives vary from fund to fund, they tend to have a relatively long time horizon and also to be fairly risk-averse.

Because of their sheer size, small increases in returns over time translates to huge amounts of money – but of course, losses mean huge amounts of money gone, putting the fortunes of retirees, students and charities at risk. “Conservative” investing is the name of the game.

Casey’s General Stores (CASY) operates roughly 2,100 convenience stores in 16 midwestern states. Though it’s far from a glamorous, high-tech story, 87% of Casey’s shares are held by institutions because the company consistently produces quality results, even as it expands.

While gasoline sales are the most visible part of the operation, it’s the groceries, snacks and drinks that really drive profits. In the most recent quarter, fuel sales accounted for 64% of total gross revenues, but because of razor thin margins of just 20 cents/gallon (7.3%), fuels only contributed 23% of net revenues – after the cost of goods sold.

In comparison, Groceries sold at gross margins of 32% and Prepared Food and Fountain Drinks enjoyed gross margins of 64%. With clean and inviting locations and its own lines of high-margin food items, Casey’s has become a go-to spot for its customers to pick up their favorite beverage as well as breakfasts, lunches, and more.

In many urban areas, professionals descend on a Starbucks (SBUX) or similar competitors for their daily fix. In the rural Midwest, that role is often filled by a Casey’s General Store. Management noted in the latest earnings release that breakfast food and drinks “continues to be a strong contributor to overall results.”

A popular loyalty program and heavy emphasis on fleet fuel sales keep customers coming back to Casey’s on a regular basis.

To understand why institutions invest in Casey’s for the long term, let’s look at two charts showing 15 years of history.

Notice that not only has the share price been climbing steadily over the past 15 years, it was also minimally affected by the financial crisis in 2008, recovering all of the lost value by the middle of 2009, something it took some of the (former) technology and finance high-flyers many years to do.

This is why the shares keep climbing – so do the earnings. And the estimates show that same, beautifully boring uptrend. Recent upward revisions earn Casey’s General Stores a Zacks Rank #1 (Strong Buy).

Casey’s, which has grown from a single Iowa location in 1968, has exactly the kind of balance sheet you’d expect from what started as a family-owned midwestern business – with a healthy cash position and near-total ownership of real estate and other assets.

That insulates Casey’s from fluctuation in rent prices it can’t control. Its two company distribution centers supply 90% of in-store items and 75% of gasoline, helping to control costs and stabilizing earnings performance.

Learn From the Pros

Everyone has different investment objectives and time horizons, so it doesn’t make any sense to follow the institutions blindly into any particular holding, but...paying attention to what they’re buying is a great place to start for savvy individuals.

Casey’s general Store is a great example of the rock solid performance that the huge money managers seek out. Sure, you could say gas stations and convenience stores are boring, but there’s boring about making money.

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