There's Still Time to Add Murphy USA (MUSA) to Your Portfolio

·6 min read

The Oil/Energy space has continued to move higher this year after comfortably topping the S&P 500 leaderboard in 2021. It has generated a total return of more than 51% in 2022 compared with the S&P 500’s loss of 21.3%. Apart from a constructive demand picture, the sector is enjoying support from geopolitical uncertainty amid Russia’s military operations in Ukraine. In March, crude prices surged to multi-year highs of $130 on concerns about supplies from Russia, which is one of the world's largest producers of the commodity. Naturally, there are some stocks that have been rocking since the start of the year and have strong earnings trends to back the moves.

One such company is Murphy USA MUSA. It is a leading independent retailer of motor fuel and convenience merchandise in the United States. The El Dorado, AR-based company, in its current form, came into existence following the 2013 spin-off of Murphy Oil Corporation’s downstream business into a separate, independent and publicly-traded entity. Murphy USA markets refined products through a chain of retail stations, almost all of which are located near a Walmart supercenter, primarily in the Southeast, Southwest and Midwest United States.

Let’s discuss the reasons that make Murphy USA an attractive pick:

Solid Rank and VGM Score

Murphy USA is a Zacks Rank #1 (Strong Buy) stock in the Zacks Oil and Gas - Refining & Marketing industry, which carries a Zacks Industry Rank #14 — placing it in the top 6% of more than 250 Zacks industries. In addition to the favorable rank, MUSA enjoys a Zacks Value Style Score of B, Growth of A, and Momentum of A to help it round out with a VGM Score of A. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best upside potential.

Estimate-Beating Recent Earnings

MUSA posted robust Q1 results on May 3, with EPS of $6.08 handily beating the Zacks Consensus Estimate of $2.65 and more than tripling from the year-earlier bottom line of $2.01. The outperformance could be attributed to a rise in the retail gasoline price and a higher retail margin of 34 cents per gallon, which was up 51.1% year over year. Meanwhile, Murphy USA’s operating revenues of $5.1 billion surged 44.7% year over year and beat the consensus mark by $530 million primarily due to improved petroleum product sales.

Shares to Capitalize on Recent Momentum

MUSA shares have been moving higher, adding 68.5% over the trailing 12-month period to historic highs. The stock has nearly trebled since the pandemic-induced market plunge back in March 2020 and continues to hit a series of new 52-week highs. With the company experiencing the best market conditions in years, we believe that the Murphy USA stock has enough firepower left to keep chugging along.

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Analyst Estimates Raised

MUSA’s earnings revisions have also trended in the right direction over the last 60 days, as analysts have consistently taken up their numbers. As a matter of fact, the Zacks Consensus Estimate for Murphy USA’s 2022 bottom line has gone up from a profit of $11.42 to $17.54 over the past 60 days, while next year’s number is a rise from $10.99 per share to $13.33. During this timeframe, four analysts have increased their earnings estimates for the current year as well as next year.

Fundamental Strength

Murphy USA’s unique high-volume low-cost business model helps it retain high profitability even in the fiercely competitive retail environment. The company, which sells more than 4 billion gallons of retail fuel annually, owns more than 90% of its gasoline stations. This allows Murphy USA to keep its operating expenses low. The proximity of Murphy USA’s fuel stations to Walmart supercenters helps the company to leverage the strong and consistent traffic that these stores attract, thereby driving above-average fuel sales volume.

The industry’s improved fundamentals in the form of constrained supply and robust demand for refined products like gasoline have led to rising refining profitability for the players involved. In fact, gasoline prices in the United States have repeatedly soared to new record highs. As a reflection of this, Murphy USA’s average retail gasoline price during the first quarter came in at $3.43 per gallon, surging from $2.37 per gallon a year ago.

Murphy USA’s 2021 acquisition of QuickChek Corporation — a family-owned food and beverage chain located — has helped the company in improving its offerings. In particular, QuickChek’s presence in large population centers like the New Jersey/New York region is likely to have lifted Murphy USA’s merchandise revenues and margins.

Finally, MUSA’s disciplined capital allocation strategy between growth and stock buybacks has been a key differentiator. While organic growth remains the top priority for Murphy USA, the company’s high cash flow generating ability is expected to support its new $1 billion repurchase plan.

Bottom Line

Given this backdrop, this appears to be a solid time to consider buying Murphy USA. While there are some apprehensions that the company may have gotten too far ahead of itself, especially with the prevailing inflationary pressures, the tightness in product demand should keep gasoline margins elevated moving forward. This suggests strong long-term cash flows that should support higher price points for its shares.

Other Energy Stocks to Buy

Along with Murphy USA, investors interested in the energy sector might look at Equinor ASA EQNR, Comstock Resources CRK and Earthstone Energy ESTE, each carrying a Zacks Rank #1 (Strong Buy), currently.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Equinor: Equinor is valued at some $116.5 billion. The Zacks Consensus Estimate for EQNR’s 2022 earnings has been revised 15.1% upward over the past 60 days.

Equinor, headquartered in Stavanger, Norway, delivered a 1.9% beat in Q1. EQNR shares have surged around 53.9% in a year.

Earthstone Energy: ESTE beat the Zacks Consensus Estimate for earnings in each of the last four quarters. The company has a trailing four-quarter earnings surprise of roughly 35%, on average.

Earthstone Energy is valued at around $2.2 billion. ESTE has seen its shares gain around 83% in a year.

Comstock Resources: Comstock Resources is valued at some $4.7 billion. The Zacks Consensus Estimate for CRK’s 2022 earnings has been revised 43% upward over the past 60 days.

Comstock Resources, headquartered in Frisco, TX, has a trailing four-quarter earnings surprise of roughly 3.7%, on average. CRK shares have gained around 189.3% in a year.

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