I recently took a hard look at Susser (NASDAQ:SUSS) and took a pass. Although I wouldn't be surprised if the company performs very well in 2007, the recent results confirmed my beliefs that there are some moving pieces that I don't understand well enough to put my money into the stock.

Company snapshot
Susser is the largest non-refining operator of convenience stores and gas stations in Texas. The company operates 325 convenience stores (c-stores) in Texas and Oklahoma, as well as 146 Laredo Tacos in conjunction with its c-stores, and distributes fuel to 367 independent dealers on a wholesale basis.

The company used to operate its c-stores under the licensed Circle K brand, although it recently rebranded its stores under its own Stripes brand. The company believes its "convenience factor" is an effective contrast in response to hypermarkets, many of which sell cheap gas, such as Wal-Mart's (NYSE:WMT) Sam's Club or Costco (NASDAQ:COST).

Recent results
Although it's nice that the company cut its red ink to about an $11 million loss for the fourth quarter of 2006 from a $31 million loss in the prior-year period, there are some things that made me uncomfortable. (For more information, check out the Fool by Numbers.)

What I like about Susser
First and foremost, Susser's low stock price and understandable business model drew me in like a moth to flame. Susser's stock is down about 20% from its high, giving the company a $270 million market cap. If I add in $87 million in net debt (debt minus cash), this gives the company a $357 million enterprise value (EV) (equity value plus net debt). For 2006, Susser earned about $45 million in adjusted EBITDA (a measure of cash flow), giving the company an EV/adjusted EBITDA multiple of 8.

Although this isn't screamingly cheap, I believe there are numerous ways for Susser to create shareholder value. First and foremost, Susser can pay down its high-cost debt. Susser currently has $120 million in debt at 10.625%, a very high cost compared to the current low level of interest rates.

I also believe that the current financials are somewhat obscured by one-time items (the cost of rebranding its c-stores, extinguishing debt, etc.), and perhaps management could ramp up cash flow and become a much more efficient organization.

Lastly, Susser seems to have ample growth prospects. The company's Laredo Taco restaurant operations are performing very well and helped drive same-store sales growth of 6.5% in the latest quarter. Furthermore, the company plans on adding 18-22 new c-stores (all with Laredo Tacos) and 25-35 new wholesale fuel dealer locations in 2007 -- adding dealer locations requires low capital outlay and so provides a high return on capital. The company targets EBITDA growth in the mid-teens for 2007. As an added bonus, the company owns the property at 119 of its c-stores and 41 of its dealer sites.

What I don't like about Susser
That said, there were some factors that made me uncomfortable. Although I think Susser's merchandise and food sales will continue to perform well, I still can't get comfortable with its fuel segment, which accounted for nearly 83% of total sales in 2006.

In the latest quarter, adjusted EBITDA fell to $5.9 million from $13.8 million, because of an $8.5 million decrease in fuel gross profits, offset by a $3.5 million increase in non-fuel gross profits. For the quarter, the company earned a $0.092 gross margin per gallon on retail fuel (gas it sells directly), down from a $0.148 gross margin per gallon in the prior-year period, and down from $0.21 in the previous quarter.

I was a little disturbed by the drop in fuel gross margins because the company recently signed a new supply distribution deal with Valero (NYSE:VLO), which the company believes was very favorable. Although the decline in fuel gross margins is likely temporary, because of a rise in fuel costs and the lag time it takes for Susser to pass through those increased costs (as well as some complications with the switch to Valero), it still makes me uncomfortable that the volatility in fuel prices can drastically alter results.

But fuel cost volatility isn't a deal-killer for me -- as long as I know the problems are short-term and the fluctuations temporary. The thing that stopped me cold was my inability to forecast free cash flow (FCF).

Here's my problem. To calculate FCF, I start with Susser's projected "adjusted EBITDA," which strips out one-time expenses. Then I strip out cash interest expenses, cash taxes, and cash maintenance capital expenditures to arrive at projected "normalized" FCF of $25 million. But I feel it would be prudent to add the cost of replacing closed stores to maintenance capital expenditures. After all, the company needs to do this in order to maintain its store count, so in my book, that should be considered maintenance capex.

Given the wide range of estimates here, the only logical thing to do in my mind is pass on Susser's stock until I'm more confident with the issues.

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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.