Casey's a Heavy Hitter

Casey's just hit one out of the park.

The market clearly liked convenience store operator Casey's General Stores' (Nasdaq: CASY  ) record year-end earnings, as the stock jumped almost 20% after Wednesday's press release. It was an overall up day in the market after an extended rough patch, but Casey's numbers were strong, as is its outlook.

Sales for the year increased 25.4%, while earnings from continuing operations increased an even healthier 48.7%. The press release detailed that the company performed ahead of its initial expectations in all major categories, including same-store gasoline sales, grocery and other merchandise items, prepared food and fountain drinks, and store expansion, which includes acquisitions and new store openings. Overall, same-store sales growth for the year was strong and in the 4% to 7% range for all major product categories. The company built 15 new stores and acquired 49 Gas 'N Shop stores, but closed 10 stores because they were too close to other Casey's stores. Almost all stores are company-owned, so franchise fees make up a very small portion of sales.

One interesting item was that Casey's average profit margin for gasoline per gallon was 11.5 cents, which demonstrates how little a convenience store actually makes off of gas that costs consumers near $3 per gallon these days. That margin is low, but gas sales make up almost 70% of total sales and bring in customers to purchase food and groceries, whose gross margins are in excess of 30%.

Growth for the year was well ahead of what Casey's has been posting historically, as sales have grown 11.2% on average annually over the last five years while earnings have grown only about 2.3%. One important positive is that cash flow from operations has averaged almost three times net income for the last three fiscal years. I'll wait until the 2006 10-K is filed for a comparison, but taking out annual capital spending to open and acquire stores still leaves a solid amount of free cash flow, or near net income levels, implying that P/E ratios are a good proxy for P/FCF multiples.

Looking forward, Casey's has plenty of growth opportunities because it operates about 1,400 stores in only nine Midwestern states, primarily in Iowa, Missouri, and Illinois. Plus it added to its distribution facility next to its Iowa headquarters and can service an additional 1,000 stores. And it probably faces lower levels of competition compared with other convenience stores such as The Pantry (Nasdaq: PTRY  ) , QuikTrip, KwikTrip, and 7-Eleven, which Fools may remember as a successful past Stock Advisor pick before it was repurchased by the parent Japanese 7-Eleven. Casey's advantage can be attributed to the fact that it has a good track record of snapping up struggling mom-and-pop shops, and about 75% of stores operate in towns with populations under 20,000, also keeping it out of the way of behemoth Wal-Mart (NYSE: WMT  ) and other stores with convenience aisles, such as Walgreen (NYSE: WAG  ) and CVS (NYSE: CVS  ) .

Based on next year's earnings, Casey's is trading at a reasonable forward P/E of about 18. Acquisitions can always bring peril, but the company's debt levels are moderate, helping it to better withstand any unforeseen difficulties. The stock is again approaching its 52-week high, so it might be best to see if there's any pullback, but as long as things go according to plan, Casey's should post some solid growth numbers over the next few years and win a few more for the small-town fans.

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Fool contributor Ryan Fuhrmann is long shares of Walgreen but has no financial interest in any other company mentioned The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss the company further.

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