Oil goes up, oil goes down. And it doesn't matter, because you are still filling your car with gas. In fact, for many gas station owners, gas is more like a loss leader than a profit center. Which is why you might find it interesting to watch gas station stocks like CST Brands (NYSE:CST), Murphy USA (NYSE:MUSA), and, from a slightly different angle, Getty Realty (NYSE:GTY).
If you want to drive you need to buy gas -- it doesn't matter what the price of a gallon is. If prices are high you might look for the best deal or hold out longer between fill ups, but you are going to buy gas. Which is why demand for gas is fairly constant. Although often volatile gas prices can push revenues and profits up and down, believe it or not, gas isn't always the biggest business for a gas station.
Take a look at your local station, if it's anything like mine it has a convenience store attached to it. According to Getty Realty, which is a real estate investment trust (REIT) that owns gas stations, gas makes up 77% of sales at a typical gas station/convenience store combo, but only 35% of profits. That means that gas station owners are using gas to get you in the door to buy other things, like coffee, soda, and chips (and cigarettes, beer, beef jerky, etc., etc., etc.).
The Wal-Mart connection
Looking at gas stations from this perspective, oil prices and gas prices can do what they want -- gas stations are about convenience. And that's why you might want to take a look at Murphy Oil USA, which was spun off of Murphy Oil (MUR) in late 2013. Murphy Oil USA runs roughly 1,200 gas stations and convenience stores across 23 states.
The interesting thing here is that Murphy Oil USA's stations tend to be located near Wal-Mart stores. That's important because shoppers frequent Wal-Mart regularly to buy everything from food to clothing. And, while there, why not fill up the tank?
How big a lift does Murphy Oil USA get? According to the company, a typical gas station at a grocery store sees around 2,400 customers a day. Murphy Oil USA stations at a Wal-Mart Neighborhood Market (basically a grocery store) gets nearly 4,000. And a Murphy Oil USA station at a Wal-Mart Supercenter gets around 6,000.
At first blush you might think that being next to a Walmart would dampen convenience store sales. However, Murphy Oil USA has been building this relationship since 1996 with plans for further expansion. So something must be working. In fact, Murphy Oil USA has found that its single serve items actually compliment Walmart's focus on larger take home offerings.
Already twice as big
CST Brands, which was spun off of Valero Energy in early 2013, is another gas station play. This company owns or supplies gas and convenience store products to around 3,000 stations in the U.S. and Canada. However, the big news here was the late 2014 purchase of the general partner of CrossAmerica Partners LP (CAPL), another gas station company. According to CST, this move doubled its footprint.
However, that's not really the big news. The big news is that CST now runs an LP, which gives it another avenue for fueling its own growth. This is possible because CST can sell, or drop down, assets to the LP to raise cash to use for future acquisitions and expansion.
But because CST is the general partner, it still benefits from the stores it sells to the LP. Basically, CST gets paid to run the LP and gets incentive payments for increasing the LP's distribution. The benefit of the LP are already on display; the pair inked an acquisition within a month of CST's purchasing Cross America's GP. So, for those seeking growth, CST is literally positioning itself to grow.
So far we've looked at two companies that directly operate and supply gas stations. That exposes them to some risk. For example, cigarettes sales are slowly declining and that's a big business for convenience stores. So, too, are sales of carbonated beverages, which are also slowing. So there are operating headwinds that these companies have to deal with beyond the volatile price of gas. What if you could own gas stations without having to get involved with running them? That's where Getty Realty comes in.
Since Getty is a REIT that owns gas stations. So instead of sales, Getty is worried about rent. What's really interesting here is that it's harder to build a new gas station than you might think. There are zoning issues, space constraints, and the always important location, location, location to consider. Getty owns over 900 gas stations in 23 states with a 98% occupancy rate. It's average lease term is around 12 years.
It's also worth noting that the properties are largely triple net lease deals, in which the lessee has to pay for most of a property's operating expenses. So Getty really avoids getting involved in the stations it owns, which might be right for someone who likes the idea of gas stations but not the idea of running one. And Getty's yield of around 5.4% is pretty sweet if you are looking for income.
Gas is boring
Gas is one of those boring things that we all use and need regularly. Which is what makes it such a good base for an investment idea -- only you need to remember that it's often not the gas that's important to the bottom line at a gas station. Which makes the gas station industry a little more complex than you might think. But if you are willing to do some homework to understand the industry's drivers, then Getty, CST, and Murphy Oil USA are three interesting gas stations stocks to watch.
Reuben Brewer has no position in any stocks mentioned, but admits to buying overpriced beef jerky at gas stations. The Motley Fool has no position in any of the stocks mentioned. 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.