Please ensure Javascript is enabled for purposes of website accessibility

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

By Michael Lewis - Feb 22, 2014 at 9:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Murphy USA (MUSA 2.08%) 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Murphy USA Inc. Stock Quote
Murphy USA Inc.
MUSA
$254.41 (2.08%) $5.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
356%
 
S&P 500 Returns
124%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.