Caseys General Rural America

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While city dwellers might not be familiar with the name, those who live in rural America -- particularly the Midwest and Great Plains -- know that Casey's General Stores (NASDAQ:CASY) is much more than just a gas station or convenience store. For families in a time crunch, Casey's is also the go-to location for groceries and prepared food -- particularly pizza, where Casey's is now a major player on the national scene.

The company released mixed earnings results for its fiscal second quarter this week, with results coming in well below stated expectations. There were, however, a number of hopeful signs that might help explain why the company's shares were more-or-less unchanged following the release.

Casey's General: The raw numbers

Because Casey's relies on fuel for a large portion of sales -- but a much smaller portion of earnings -- numbers can swing wildly and management has little control over this. Knowing that, here's how the headline numbers broke down for the company.

Metric

Q2 2016

Q2 2015

Year-over-Year Change

Revenue

$1.92 billion

$1.92 billion

0%

EPS

$1.44

$2.00

(28%)

Free Cash Flow

($42.6 million)

$35.1 million

N/A

Data source: Casey's General Stores, SEC filings. N/A = Not applicable due to negative free cash flow.

Because of the effect of fuel sales, it can be very difficult to figure out if this was a good or bad quarter for shareholders. CEO Terry Handley explained that, "fuel margin was 6.1 cents per gallon lower than ... a year ago, which impacted ... earnings by approximately $0.52 per share." In other words, if the conditions were the same as in 2015, EPS would have fallen by only 2%.

Getting a better grip on the three key segments

As I said, Casey's is much more than just a gas station. Its operations are broken down into three segments: fuel, groceries (which notably includes cigarettes), and prepared food (namely, but not limited to, pizza). Here's how each segment performed, relative to the goals set out by the company this summer.

Segment

Comps Goal

Q2 Comps Actual

Margin Goal

Q2 Margin Actual

Fuel

2%

3.7%

$0.184

$0.186

Grocery

6.2%

3.1%

32%

31.8%

Prep. Food

10.2%

5.1%

62.5%

62.9%

Data source: Casey's General Stores

As you can see, the fuel category did quite well. But while margins were healthy in both the grocery and prepared food categories, the growth in comparable-store sales (comps) fell well short of expectations.

This isn't anything new. Last quarter, grocery and prepared food showed comps growth of 4.7% and 5.1%, respectively. Unlike last quarter, however, management was clear that the company won't be meeting its stated goals for the year.

On prepared food, Handley said, "Obviously, we will not be hitting that goal." And on groceries, he admitted much the same: "[it will be] very challenging to hit that goal." He did, however, state both categories could see acceleration in comps moving through the rest of the year.

While the skeptic might consider that wishful thinking, the recent past suggests the company could be headed in the right direction. In a rather embarrassing snafu, Casey's admitted in late October that it had inadvertently shared a prepared food comps figure with an analyst. That figure showed 4.9% growth. The stock fell 2% when that information was released.

With the quarter finishing out showing 5.1% growth, some acceleration could already be present.

Another silver lining

One of the other troubles with Casey's recently had been the slow pace of expansion, relative to what management's stated goals were. That's not the case anymore. As the company outlined in its release:

  • During the fiscal 2017 year (which is half-over), the company plans to build/acquire 77 to 116 stores, replace 35 existing stores, and remodel 100 locations.
  • Further, there is construction or remodeling taking place on 98 stores.
  • Finally, there are 84 new stores and 15 acquisition stores currently under contract.

Clearly, this is a major acceleration in new store openings. This helps explain why free cash flow dipped into negative territory this quarter.

To put all of this in perspective from a valuation standpoint, the company's stock now trades for 21 times future earnings and 72 times trailing free cash flow. Whether that represents a good entry point relies heavily on the company's ability to meet expansion goals while increasing comps for both the grocery and prepared food segments.

Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Casey's General Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.