This fall, oil company Murphy Oil spun off its retail business Murphy USA (MUSA 1.57%) in typical spinoff fashion -- unnoticed and ripe with goodies. The key to a great spinoff investment is having all of the info before the company actually spins off, allowing for maximum returns. Unfortunately, this business has been on the markets more than three months now and, unfortunately, the stock has already risen 12%. But investors may have more opportunity ahead, as there is increasing evidence that Murphy USA remains an appealing stock based on both valuation and growth platform. Here's what you need to know.
Murphy USA is a gas station and convenience store business that focuses on low-cost, high-volume retailing. Appropriately, the company has stations in the parking lots of Wal-Mart stores.
Similar to Wal-Mart, the company is a cash-generating machine. Murphy USA buys unbranded gasoline so that it can sell at lower costs than its competitors. Gas stations aren't the greatest businesses themselves -- they are typically low-margin and competition is fierce -- but the convenience stores are a different ball game. Murphy USA enjoys healthy margins in its sodas and foods.
Why it's still appealing
On an EV/EBITDA basis, the company trades at just 5.72 times trailing EBITDA. By any measure, that is a low, low number. Trailing gross margins haven't been the greatest in the past couple of years, but some believe that is turning around -- including hedge fund Grizzly Rock Capital. And remember, this business is about volume.
For a company with a $2 billion market cap, Murphy USA generates a ton of cash -- nearly $500 million in operating cash flow last year. As the company expands and further refines its business model, cash flow will only grow.
Compare it to Casey's General Stores (CASY -0.20%). Casey's is in a very similar business, though it's not nearly as well capitalized, with less than $200 million in cash and $820 million in debt (Murphy has more than $200 million in cash and less than $500 in debt). The company does have better margins (it's not trying to do the lowest-price thing) and trades at an EV/EBITDA of 9.7 times. Its forward P/E is nearly 18 times, and it didn't generate nearly the operating cash flow that Murphy did last year.
Another feather in Murphy USA's cap is a bevy of insider purchases. Since the company's market entrance, the CEO along with a VP and directors have done nothing but buy stock. Andrew Clyde, Murphy USA CEO, has bought 6,000 shares on the open market at prices ranging from $37 per share to just under $42. One director has purchased more than $1 million worth of open-market shares -- adding to an already tremendous position accumulated during the spinoff from its parent, Murphy Oil.
As long as Murphy USA sticks to its plan and executes competently, investors can expect big things in the future, as this is a cheaply priced cash printer with a formula for success.