In this podcast, Motley Fool Host Mary Long caught up with Motley Fool Canada's Jim Gillies for a look at three companies you can find on your next road trip.
They discuss:
- An industry where investors can ignore sales growth.
- What shifting consumer tastes mean for convenience stores.
- One company that is "taking over a mountain no one else wants."
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This video was recorded on Sept. 15, 2024.
Jim Gillies: When investing, we talk about the cash owned. How much cash a company own. A business is valued on the cash it can make from now until the end of time, discounted back to the present at an appropriate discount rate. That's stock valuation 101. But I think that misses a key point of the game of investing. That is, well, what if management are morons?
Ricky Mulvey: I'm Ricky Mulvey and that's Motley Fool Candidas Jim Gillies. My colleague, Mary Long caught up with him for a quick road trip. They've got to look at three gas station stocks, including one going for a big acquisition, one selling frozen pizzas, and a market smasher that Jim personally owns.
Mary Long: Our first pit stop is at Alimentation Couche-Tard. Jim, you want to rank my French before we keep going?
Jim Gillies: That's a solid 9 out of 10, Mary. That's all then.
Mary Long: I will take 9 out of 10 when I can get it honestly. Americans and Canadians both will probably recognize the Circle K brand which Couche-Tard owns. But this is a convenience store company with a pretty global presence. They've built that global presence largely through acquisitions. To say that they have a good track record with those acquisitions is probably a bit of an understatement. Since 2004, they've integrated more than 65 deals into the store network. Now have nearly 17,000 stores worldwide. That includes licensees. Jim, successful acquisitions can be hard, but Couche-Tard seems to have figured out how to do him well. What is the secret?
Jim Gillies: Well, Mary, the secret is blocking and tackling. I actually don't even know what that means. I hear it a lot in conference calls when people talk about what are you going to do to be successful? They're, oh, we're going to block and tackle.
Mary Long: Somebody is right.
Jim Gillies: I presume it's a football reference, but I'm a hockey fan, so I don't really know. I think you've already said the answer, and the answer is, they have a system, and they honed the system when they were a lot smaller. From about the year 2000 is when they really started ramping this up. Might have been even a couple of years earlier. They started small, and they were smaller, of course and so they honed a process, if you will. They have a system, and they also have a growth impaired. I think they're about $72 billion market cap. Canadian dollars, not greenbacks. They are continuing because they think there are still more worlds to conquer. They've had a little bit of a pushback and they've got a couple failed acquisitions recently. They lost out on, I don't remember the name Speedway or something. They lost out to the parent company of 711 on that. One I think in 2020. I think that's Seven & i Holdings. They also made a play for a French grocery store chain which is a bit far afield from their standard companies called Carrefour. They lost them. I think in 2021 or 2022. Carrefour wasn't in. The Team Canada Fools, we were joking. Is that management here just really wanted a trip to Paris and said, oh, we'll call it due diligence. I think they are one of those classic growth through acquisitions who they have a process and that is what they're going to follow even as they get larger and larger.
Mary Long: You briefly mentioned Seven & i Holdings and Couche-Tard came into the news recently. We're going to switch between American and Canadian dollars because I've got my American dollars. But Couche-Tard made a $42 billion offer for the 711 parent company, Seven & i Holdings. That was earlier in the summer. It sounds like yesterday. Today, we're recording this September 6th, Seven came back asking for more. That's certainly not a done deal, but we're talking about acquisitions. What do you make of the potential deal between Couche-Tard and Seven & i Holdings?
Jim Gillies: I think it would be great and I think it's unlikely to happen or if it does happen, it is going to be a very difficult multi-year slog. You are correct. It is about 12 hours ago. Says 12 hours, when you'd be listening to this a week or so from now. Yesterday, late on 5th September, the Japanese parent of 711. That would be Seven & i Holdings. Officially, said it was not in the best interests of Seven & i and other stakeholders and the quote is, "We are open to engaging in sincere discussions, should you put forth a proposal that fully recognizes our stand-alone intrinsic value and addresses our concerns regarding the closing in the current regulatory environment." Translation, it's going to be really hard to buy in Japan, which is notoriously standoffish to foreign acquisitions although they have loosened their regulations there within the last year or so. As well, your offer is too low. We need more. It probably would face some regulatory issues in North America when a street corner with a Circle K on one corner and then Kitty Corner to that is a 711. They're both owned by the same company. I think US regulators will probably raise the proverbial Spaki and eyebrow a little bit. But I think it's a bold deal. I haven't verified this, but if this deal does successfully go through, it would make Couche-Tard the fourth largest retailer in the world after names like Costco, Walmart, and Amazon. I don't know if you've heard of them.
Mary Long: This is a gas station, so fuel revenue still make up the bulk of revenues for the company, but we have seen total sales in that segment slip between 2023, 2024. There's a lot to love about Couche-Tard. It's performed quite well in recent years, but a knock against it maybe. That its sales growth recently has been slow, uneven. Why do we see that slowness, that uneveness? Is that just volatile fuel prices being volatile and the price to pay for being in the space?
Jim Gillies: Give me $140 barrel oil again and you'll be fine with the sales growth. But put it that way. I ignore sales when it comes to these types of things that's reliant on gas simply because of what you said. It's so volatile. I think it's better to focus on profitability metrics, up and down the income statement. Yes, you can even go with EBITDA if you want. Operating profit returns on equity. You want to focus on margins, like gross margins, for example. You want to see profitability is steady. As they grow and grow they still are able to maintain their margins. Gross margins, aside from one year during COVID where they somewhat made bank for some inexplicable reason, probably because people were only comfortable going to those stores rather than other places. Gross margins here typically run 17,18%, operating margins run 5-6%, nice, boring, consistent. Ignore the sales number, because, as you say, it will bounce around a lot. That you have no control over, too.
Mary Long: When it comes to margins, they see much higher margins inside sales, so stuff like food, lottery tickets, etc that are sold in store. Something that I caught is that nicotine products account for almost 40% of Couche-Tard's merchandise sales. Again, those inside store sales. How might shifting consumer taste like a turn away from cigarettes or even just thinking about the gas piece, a push toward EVs, impact Couche-Tard or just any gas station player in the space.
Jim Gillies: I'm actually shocked in North America when I see anyone who's smoking anymore. I'm old enough to remember when there was a smoking area at my high school. You try and tell my kids you'd go to a bar and there'd just be a haze of blue smoke about three feet above everyone's head, and that was normal. You're shaking your head, going, no, I don't remember that. You're old, Gillies. A lot of the damage to the cigarette case is already done and was done several decades ago. We're in a care-taking mode and they've proceeded to go ahead just fine. You've also got things like vaping, nicotine pouches, the different ways to deliver your nicotine cravings. I don't personally have nicotine cravings, but some people do. Then there's little things, too. You're not going to have known about this because you're in Colorado, and I'm in Ontario but this very week Mary, the Ontario government now allows the sale of beer, wine and alcohol in corner stores and convenience stores. This has literally happened this week.
Mary Long: Typically, don't you have to go to the LCBO?
Jim Gillies: Well, look at you showing off the [inaudible]. There you go. LCBO beer store. But a few years ago, they started allowing grocery stores to do it and they finally are allowing it in the corner stores like Circle K. I could just as easily say why will that not drive sales like a Circle K and other Couche-Tard outlets rather than worrying about the nicotine purveyors to pull off. The other thing we are seeing a pullback in electric vehicles. Once you get rid of a certain company which we won't name, but a lot of the vehicles from the legacy automakers. If you want yourself a Ford Moche trust me, you can find inventory. There's a lot of inventory out there and you'll get a good deal because they're just not moving. But I think you're going to probably see more and more EV charging stations at places like Circle K.
I wish we were in this visual medium today, because I would show you a picture I snapped last year because I drive my daughter to school every morning. There's a Circle K down the street from her high school. I snapped the picture in the morning because not only your gas station and the Circle K banner out front, but there is both a Tim Horton's kiosk in there, so you can get your coffee fix and a fire and flower within a store, which is a canapas store within Circle K. That is the most Canadian picture I've ever seen. You get your tips, you get your canapas, you get your gas. They've got this network where they will sell and they'll try different things and they'll bring in the Timmy's kiosk, where they think it works. I would ask anyone going to the fire and flower please consume whatever you buy when you get home, not in your car while you're driving, so close to a high school. Thank you. There are levers that these guys can pull to keep their business going, and I think they're pretty good at it.
Mary Long: You're a value investor. Couche-Tard is trading at the lowest PE ratio of all the stocks that we're going to talk about today less than 20 times earnings at the moment. What's not to like?
Jim Gillies: No argument from me.
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Mary Long: Next up we'll head over to Casey's, which is a Midwestern US chain. It operates both convenience stores and gas stations, but it leans way more into the convenience store piece. They are really big on pizza, especially, allegedly, have tried it myself, breakfast pizza. They're also really big on being in underserved areas. Seventy-two percent of Casey's stores were opened in places with less than 20,000 people. Jim that strikes me as an interesting business plan. Go where no one is.
Jim Gillies: I love that. I call that taking over a mountain no one else knew they wanted. The example I always use when I bring up that term is pro wrestling. All of life can be understood through pro wrestling.
Mary Long: Ricky will agree with you on that.
Jim Gillies: You could hear the eyes rolling. But I'm serious. Everyone would turn their nose up at pro wrestling for years and years. Vince McMahon and the WWF are now WWE, now part of TKO Holdings, basically went national, and then went international, took over all of the old territories, where there would be a Texas Wrestling Federation and Carolinas and a Florida and up in Calgary, Alberta. Basically, the WWE just went through and took over everything. All along the way, everyone is like, well, but it's fake fighting, it's pro wrestling. It's not serious. You wake up one morning, and it's this worldwide phenomenon dominated by one company. Here has a couple of smaller entities, and now it's merged with the UFC. Everyone hand waved it away all the way along as Vince McMahon built his Empire. He's now largely out, but that's another thing. That's to bring it back to Casey's. What a fantastic idea. Underserved areas, we're going to go in, we're going to be the incumbent. Circle K might come in later, 711 might come in later, but we've already been here for a decade or a decade and a half. People in the community know we're here. Might discontinue to go. Inertia is a powerful thing. Habits a powerful thing. You can probably keep the breakfast pizza, though I'm not terribly interested about that.
Mary Long: The comparison that you make is apt because the business plan certainly seems to be working for Casey's. It's more than doubled the performance of the S&P over the past 10 years. What is it doing? You might pass on the breakfast pizza, but it seems that they're doing more than maybe just making really awesome beloved pizza.
Jim Gillies: Well, I am reminded. I think it was Babe Ruth. The reporter once says to Babe Ruth, "Hey, Babe, you got paid more than the president last year." Babe Ruth shoots back. "Yeah, but I had a better year than him." I think that's the Casey story. I've not looked terribly close at this company. I've glanced at it from time to time, but if you take a look at it, the profitability growth has outpaced the market. They have a five-year operating profit growth of almost 17%. They started from a low valuation a decade ago. They got good and steady returns on capital. Those things together add up to a market beating investment. As you say, it's roughly doubled what the S&P has over the past decade.
Mary Long: The gross margin on food sales at Casey's. This is going to be a common theme with any of these companies that we're talking about today. Is close to 60% while margin on fuel is closer to 10. The thinking goes that fuel is what gets people in the door at a lot of these places, but around 70% of Casey's inside transactions don't even include fuel. At that rate, why even bother with gas at all?
Jim Gillies: Because you don't want to lose the other 30%. Really, that's it. What's the relative value of said transaction? I get a higher margin on the $10 of chocolate bar and soda I'm buying but the $75 in gas I just put in my car. I might go 10%, but the dollar value profitability is not going to be that dissimilar. Then, of course, you also do have some people buying fuel and buying the junk as well. They're going to store. I think it's probably I say well, we have to offer it. Look, when we're all driving flying electric cars they'll probably stop offering gas. But until then, I think it's probably pretty safe.
Mary Long: They're trading at around 28 times earnings, does that make you like them even more less?
Jim Gillies: Well, I am more interested in cash flow multiples and cash flow metrics than I am in accounting earnings. I think the 28 times earnings is probably best view. When you view it toward a range, you could use EV I hate EV to sales, but that's another story. But you can use whatever metric you do. You want to do a time series to see where we are, these EV, say the last decade. When you look at Casey's, most of those valuation metrics or the pricing metrics, really, but most of those are today toward the high end of their historical range. I tend to be of the opinion that most of the time gravity is the thing and long-term average will win out. I'd probably look at Casey's as, this is probably a dollar-cost averaging. If I want to build a position, I'm probably looking to buy in thirds or even fifths. I'm probably taking my time dollar-cost averaging every three or six months, maybe taking a look, maybe adding a bit more cash here and there. This is not one I would run into make a 10% position on Day 1.
Mary Long: Both of the companies that we've talked about thus far have pretty impressive track records, both handily outperforming the S&P over the past 10 years. This next one though, blows them all out of the water, and you brought this to my attention when we were talking about this. It's up over 820% in the past 10 years, over 1,200% since its 2013 IPO. It is drumroll, please, Murphy USA, a gas station chain with a whole lot of stores located right next to Walmart. Those are pretty impressive returns. Probably important to know that the company buys back its stock very aggressively, basically have the total number of shares outstanding since it spun off from Murphy Oil in 2014. They implemented a dividend in 2020. They've made a point to increase that each year, if not most quarters. What notes have you got from management on their capital allocation strategy, Jim?
Jim Gillies: I have no notes. Of the three we're talking about today, this is the one I own. Actually, I own this one individually. I own Couche-Tard via Index Funds in Canada. I'm sure Casey's is somewhere in an index fund that I own as well. But no, I own Murphy directly because of what you've described. Their capital allocation is second to none in their space. They make a lot of cash. It is shocking to me how many times we will see this fall through but investing, we talked about the cash loan, how much cash a company. A business is valued on the cash it can make from now until the end of time, discounted back to the present at an appropriate discount rate. That's stock valuation 101. But I think that misses a key points of the game of investing. That is, well, what if management are morons? What if management, spends it all on gold toilets, giant monuments of excess to themselves and hoses out equity cookies like it's no tomorrow, and so has to buy back their own stock to offset dilution? The company might make a lot of cash, but if management just completely wastes it all, the value of that company is significantly less than or otherwise would be. With Murphy, however, I think their capital allocation is fantastic. Again, it's why I own it personally and I have for a while. I love the fact that they have been so aggressive at retiring their shares. They generally throttle it with valuation a little bit, so they might take down a little bit of leverage when the valuation ratios are higher. They might take a bit more down the stock when they're a bit lower. It's going to shock people who usually think I'm so negative, but which I'm not. I'm actually optimistic. I like to think I'm fairly realist. These guys get 10 of the 10 from me.
Mary Long: That's a yellow flag that you've got an eye on that could give you a more bearish angle on the company or something you're worried about?
Jim Gillies: I'm not really worried about too much here. The valuations are little. The pricing ratio. Is there a little pricey? I think last I looked 25 times n, which is fine. It's not great. I think the story started to get out a little bit. They did up their leverage a little bit. They got about 1.7 billion in debt, which came with the acquisition in 2021. I think that was quick stop when they bought that. This is just a well run. How do I put this delicately?
Mary Long: Don't be delicate.
Jim Gillies: That's true. When have I ever been delicate? This is a really well-run company that has outstanding capital allocation. Using the cash it generates in the service of shareholders via multiple means, buybacks, dividends, intelligent, well timed acquisitions, and investing for growth. Maybe a bit of de-leveraging, trading at a reasonable but not compelling price.
Mary Long: One of the interesting things about Murphy's is it has a massive focus on affordability. They highlight in earnings presentations that's 63% of their customers are living paycheck to paycheck, and that's up from the year prior, they want to serve that group of people. Does that apply a different pricing pressure to Murphy that maybe other players in this space don't have to worry about as much?
Jim Gillies: I'm not sure I would agree with that, I think at the pricing pressure part. I would somewhat sarcastically suggest that given what inflation has done and economic conditions of the past couple of years have done, maybe this is just a function of more people who are living paycheck to paycheck. That's a little cynical. Again, this is the variant of what I talked about with Casey's, they focus on smaller and underserved communities, under 20,000 people. They're going after a mountain. No one else knows what they want. When you are in a competitive industry, which this is a competitive industry, no one says, I don't think anyone. I have yet to meet the person that says, look, I'm a Circle K man. I will not walk into a Murphy. I will not walk into a Casey. I will not walk into 711. I think you have to have a niche. I think you have to have a differentiator. We know what Casey's is, and I think we know what Murphy's is here.
Mary Long: Also, it doesn't help if you are offering the lowest price. That's often what gets me in the door at a gas station.
Jim Gillies: Exactly.
Mary Long: Regardless of where I am.
Jim Gillies: Yep. One-tenth of a cent lower. I'm going to cross three isles of oncoming traffic just so I can get it. Yep.
Mary Long: Jim, thanks so much for hanging out today and talking about these often untalked-about companies with me. Appreciate the time.
Jim Gillies: My favorite kind.
Mary Long: It was a pleasure going on this road trip with you.
Jim Gillies: Thank you.
Ricky Mulvey: As always, people on the program may have interests in the stocks they talked about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
