Murphy USA Makes a Mint From Convenience Store Goods and Fuel Credits

The unbranded fuel stations and convenience stores bring in travelers with low-cost fuel but make the money inside the stores. Here's why investors should take a close look.

Feb 22, 2014 at 9:45AM

Murphy USA (NYSE:MUSA) has a business model that seems too simple to be smart, but it is -- gas stations that are either in the parking lots or next door to Wal-Mart stores. The stations sell unbranded fuel for a low cost. Margins aren't great in the gas station business, but Murphy and its peers make up for it inside the convenience stores. In the company's recently ended quarter, non-tobacco store products continued their upward trajectory while management made some strategic choices, such as selling an ethanol plant, aimed at monetizing non-core assets. Here's what investors need to know about Murphy USA.

Full tank
The aforementioned non-tobacco store sales grew 7.4% in Murphy's fourth quarter. The segment's gross margin dollars expanded an impressive 10.2%. Per-store operating cost dropped 2.4%. The fuel segment, as usual, is not an impressive business but gets people through the doors. Fuel sales' contribution was lower than in the year-ago quarter, but investors should not focus too closely on this part of the business. As long as Murphy manages its costs, which are lower than branded fuel stations, the stronger parts of the business will continue to shine through.

Unit-level fuel margin was $0.13 per gallon. Management targets a $0.12-$0.13 average.

Even after taking out the gain from the sale of the Hankinson ethanol plant ($1.12 per share), net income still rose precipitously -- up to $0.88 per share from $0.41 per share in the year-ago quarter. For the full year, adjusted earnings rose from $1.79 per share to $3.70 per share.

Investors should note one important element in the company's earnings. Murphy USA made a good chunk of its earnings from the sale of RINs -- renewable identification numbers. RINs are part of the U.S. government's Renewable Fuel Standard that requires the use of biofuels. Refineries and terminal operators (like Murphy) can buy and sell the commodity-esque RINs at market value to cover their obligations. These are likely not reliable, long-term benefits for Murphy, and investors should remain focused on the core business figures.

Looking ahead
Murphy USA continues to expand its store footprint, adding nearly 40 stores throughout 2013 and 18 in the fourth quarter alone. Since the end of 2013, the company has opened another five stores and has 15 under construction.

The company is focusing on larger-format stores -- 1,200 square feet with more varied product offerings. The strategy makes sense considering the healthy (and growing) margins of beverages, smokeless tobacco, and non-tobacco goods.

Valuation-wise, Murphy remains compelling. The company trades at an EV/EBITDA of 5.33 times with a trailing P/E of slightly more than 11 times. Murphy USA has a very reasonable debt profile considering its asset-heavy business model, and management is dedicated to steady reductions. In the last year, the company paid down $90 million in long-term debt.

While there may be quarter-to-quarter fluctuations, Murphy's long-term strategy and unique operating model should be appealing to investors. The convenience store business will only improve, and the margins will keep plenty of cash flow coming back to the company and ultimately shareholders. Keep a close eye on this low-cost Wal-Mart of gas stations.

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