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Murphy USA Inc. MUSA is well poised to grow on the back of its high-volume, low-cost business model. However, its leveraged balance sheet is concerning. The company has seen upward earnings estimate revisions for 2020 earnings in the past 60 days.
This leading independent retailer of motor fuel and convenience merchandise in the United States is expected to see impressive bottom-line growth even during an extremely volatile year as this. The 2020 Zacks Consensus Estimate for Murphy USA indicates 151.6% earnings per share growth over 2019.
Courtesy of solid prospects, this currently Zacks Rank #3 (Hold) stock is worth holding on to at the moment.
What’s Favoring the Stock?
A glance at the company’s price trend shows that the stock had an impressive run on the bourse in the past 12 months. Shares of Murphy USA have gained 5.5% against the 41.6% decline of its industry.
Murphy USA’s unique high-volume, low-cost business model helps it retain solid profitability despite a fiercely competitive retail environment. The company, which sells more than 4 billion gallons of retail fuel annually, owns above 90% of its gasoline stations. This enables it to contain its operating expenses. The proximity of Murphy USA’s fuel stations to Walmart WMT supercenters aids the company to gain traction from the consistent footfall that these stores attract, thereby driving its above-average fuel sales volume.
The company’s outsourcing of raw materials is another key catalyst. With access to pipelines and product distribution terminals, Murphy USA is able to avail of fuel at a cheaper cost than most can buy. This, in turn, allows the company to sell retail gasoline at a discount.
Through its shareholder-friendly capital allocations, Murphy USA is committed to return a portion of its free cash flow to its shareholders through continued and ongoing share repurchases. As a proof, the company spent 48% of its capital budget from 2015 to 2019 on stock buybacks.
The company aims to build up to 50 new larger-format stores annually, starting next year and 25 raze-and-rebuilds in the same period. The motor fuel retailer added that it is open to grow inorganically as well.
Management believes that the company’s strong operational performance and positive trends will allow the stock to achieve a sustainable EBITDA of more than $500 million in 2021, two years earlier than expected.
Factors Deterring the Stock’s Growth
However, there are a few factors which might impede the stock’s progress.
Being in the convenience store business, Murphy USA is highly dependent on tobacco sales. With smoking rates falling, the company’s tobacco comps continue to remain under pressure. The tepid tobacco sales not only affect its top-line performance but also limit margin growth.
Moreover, Murphy USA's high-debt levels remain a concern, which make it vulnerable to any volatility in commodity prices. Its total debt is currently more than $963 million with only $317.5 million in cash & cash equivalents. Importantly, the company's debt-to-capitalization as of the end of third-quarter 2020 was 53.1%, deteriorating from the sequential quarter's 52.8%.
Stocks to Consider
Better-ranked players in the energy space include CNOOC Limited CEO and Antero Midstream Corporation AM, each holding a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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CNOOC Limited (CEO) : Free Stock Analysis Report
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Murphy USA Inc. (MUSA) : Free Stock Analysis Report
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