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Murphy USA, Inc.: Intrinsic and relative valuation analysis

Samuel Madden, CFA of Interactive Buyside

Equity research: Murphy USA, Inc. (Part 7 of 8)

(Continued from Part 6)

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

Catalyst Description
Share Buybacks/Dividends
  • Murphy trades at a materially discount (~30%) to its conservatively estimated base case valuation of $48 per share. At current prices, buybacks will be accretive to intrinsic value.
  • Murphy will be able to lever its balance sheet by at least one turn, which would allow for the company to repurchase roughly ~21% of its capitalization. MUSA at 1.8x EV/EBITDA is less leveraged than comps, which are leveraged from 2.2x (Casey’s) to 4.6x (Pantry).
  • For the next two years, Murphy will not be allowed to return capital given its tax-free spinoff status. However, after the two-year lock-up, it is highly probable the company will return cash to shareholders, especially given the Murphy family’s preference for dividends (hold collectively over 6% of the common stock).
Growth StrategyExecution
  • MUSA’s management recently signed an agreement with Wal-Mart to build 200 locations over the next couple years, which should be accretive to owner’s earnings and intrinsic value in the long run.
  • At an average cost of $2.15 million per store, this will cost ~$430 million which will be financed over three years and financed primarily by operating cash flow, along with the possibility for asset sales and potential bank financing/ABL revolver availability if needed.
Attractive Valuation
  • MUSA currently trades at 8.0x FY2012 Owner’s Earnings and 7.0x LTM 2013 Owner’s Earnings.
  • Murphy also trades below its conservatively estimated replacement value, estimated at $41 per share and below its publicly traded peers at 6.5x EBITDA (8.6x peer average).
Coverage/Inclusion into Mid Cap funds
  • As sell-side analysts initiate coverage, the company will be presented to a wide range of investors, specifically mid-cap–focused 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).

Relative valuation

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.

Continue to Part 8

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