I'm Putting Real Money on This Spin-Off

My Special Situations portfolio follows corporate transactions like spin-offs, and that’s what I’m investing in now with CST Brands (NYSE: CST-WI), a spin from Valero (NYSE: VLO  ) . I’ll be buying $1,000 of the stock and adding it to my growing list of special situations.

The business
CST Brands operates nearly 1,900 convenience stores/gas stations in the U.S. and Canada. Over 1,000 sites are located in the U.S., with about 60% exposed to the robust economy of Texas. Domestically, the company owns 81% of its locations. In Canada, over 60% of outlets are in Quebec, while just 38% of sites are owned.

Last year CST generated revenue of $13.1 billion and would have made $379 million in EBITDA as a stand-alone entity. In addition to fuel sales, the company relies heavily on tobacco and alcohol – about 50% of store sales – like other convenience stores do. Store sales are a key driver of profitability.

The convenience store industry is surprisingly robust, with consistent growth over the past two decades, the only interruption being the financial crisis. And even then it was only fuel sales that dipped, not the more lucrative inside sales. CST expects to grow store count about 1.5% this year and refocus on growing inside-the-store sales.

The special situation
Valero decided to spin off CST last year in a move that concentrates its operations in refining. As a freestanding entity, CST has the ability to direct its own capital allocation now, and its store business will receive top attention from management – a typical benefit of spin-offs. The company expects to pay regular dividends, too, which should attract another class of investor.

Valero owners will receive one share of CST for every nine shares of the parent. The company is spinning off 80% of its CST holdings to shareholders now and retaining the other 20% for at least six months, and then divesting that interest. CST has 75 million shares outstanding.

At spin-off, CST has about $1.05 billion in debt and $184 million in cash. That translates into debt/EBITDA of 2.8 – not too high for a consistent cash generator like fuel-and-food stations.

The stock is now trading on the “when issued” market, and will begin trading the regular way in a few days. Currently it changes hands for about $27.50. I think CST can receive a similar multiple to other publicly traded peers. So how does CST stack up against rivals?

Company

2012 EBITDA Margin

Forward EV/EBITDA

Forward P/E

EV/Store

CST Brands

2.9%

8.2*

14.0*

$1.7 million

Susser Holdings (NYSE: SUSS  )

3.1%

9.5

24.5

$2.9 million

Casey's General Stores (NASDAQ: CASY  )

4.8%

7.8

16.3

$1.6 million

Alimentation Couche-Tard

3.7%

9.4

15.3

$2.4 million

Peer Average

3.9%

8.9

18.7

$2.3 million

*Trailing figures

The valuation multiples clearly sit at the bottom here, as does the trailing EBITDA margin. The average EBITDA multiple implies a price of $31 for CST, while the P/E implies a price of almost $37. That results in upside of 13%-35% from current prices.

If EBITDA margins can approach the average of 3.9%, the increase in stock price could be substantial. This average margin implies $510 million in EBITDA on CST's $13.1 billion in sales. That all translates into a stock price of $47 at the average EBITDA multiple, or upside of over 70%.

Foolish bottom line
So I'm buying $1,000 of CST Brands in my Special Situations portfolio. If the price continues to look attractive, I’ll consider buying more.

Interested in CST Brands or have another stock to share? Join me on my discussion board and follow me on Twitter (@TMFRoyal).


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  • Report this Comment On May 03, 2013, at 1:17 PM, easmith88 wrote:

    I'm looking at it too, but what do you think about the ramifications of potential health care coverage requirements in 2014? Most of the company's stores are company-owned, and they have 8800 employees in the US (66% full-time), which I would think they would have to cover. Could a refranchising strategy be a possibility?

  • Report this Comment On May 08, 2013, at 2:58 PM, TMFRoyal wrote:

    Hi, easmith88,

    That's something I don't usually worry too much about. Every company will learn to deal with the healthcare stuff.

    As for refranchising, yeah, I suppose they could do that. CST owns a lot of their own real estate and there's a lot of value tied up there.

    Jim

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