Earlier this month, I said that AlonUSA Energy (NYSE:ALJ) was still cheap, but the real question was how the company would use its cash to expand. Today, the company announced the purchase of 55 convenience stores from Good Time Stores, Inc., for $30 million in cash and $7 million in assumed debt. This purchase fits perfectly into Alon USA's current business, and also provides some good information toward the value of its retail operations.
Last November, I dubbed Alon USA a company to watch because of its experienced management team and the growth history of its parent company, Alon Israel Oil Company. Starting in 1992, Alon Israel built up its convenience-store business to a 20% market share in Israel from almost nothing, relying upon in-store sales and fast-food restaurants like KFC and Pizza Hut.
With the purchase from Good Time Stores, Alon USA appears to be following a similar path. Once this deal is completed, Alon USA's retail operations will include 222 convenience stores throughout the Southwest. In 2001, the company purchased Southwest Convenience Stores, along with 167 of its 7-Eleven branded outlets. Alon USA intends to convert the 55 new stores to the 7-Eleven brand and use its FINA brand for fuel sales.
I am excited about this purchase because it allows me to update my valuation of the company. When I said that Alon USA was still cheap, I used the value of the refinery and cash position, and looked at the convenience stores, pipelines, terminals, and asphalt operations as a "free plus."
Looking at some rough value estimates for these properties, we can add the following to our valuation model. If 55 convenience stores are worth $37 million, then the 222 company-owned convenience stores are likely worth around $150 million (222/55 times $37 million). Alon USA also owns 1340 miles of crude and product pipelines. Based on the company's recent sale of 529 miles of pipeline for $68 million, I estimate the value of the remaining pipelines at $170 million (1340/529 times $68 million). If we assume the Big Spring asphalt operations are included in the valuation of the refinery, and ignore the value of the six product terminals and the 1,139 bpd (barrel per day) asphalt refinery in Bakersfield, Calif., we end up with the following:
|
Item |
Market Value (millions) |
|---|---|
|
Big Spring Refinery |
$700 |
|
Net Cash Position |
$150* |
|
Convenience Stores |
$150 |
|
Pipelines |
$170 |
|
Terminals & Bakersfield Asphalt |
$0 |
|
Total |
$1,170 |
$1.17 billion is an estimate of the liquidation value of the entire operation. The current enterprise value (market capitalization minus net cash) for Alon USA is about $990 million. Therefore, even though the shares have risen almost 25% since I said they were cheap, this valuation indicates that a 15% margin of safety remains in the current price.
Of course, this is only one rough estimate of value. I am making some big assumptions in establishing the values of the refinery, convenience stores, and pipelines -- one good reason to insist upon a substantial margin of safety. The value doesn't consider cash flows, competitive position, or growth opportunities. To deliver long-term, market-beating returns, Alon USA will need to continue growing. But if its shares get knocked below $20, I'll be back on the trading floor, taking a second helping.
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Robert Aronen owns shares of Alon USA. Feel free to share your comments with him at [email protected]. Bakersfield , California makes him think of Buck Owens. Folks who have never heard Buck Owens should take a few minutes to listen to his hits from the '60s. America has lost a true original. The Motley Fool has a disclosure policy.
