Murphy USA (MUSA)
Murphy USA MUSA 0.00%↑ operates gas stations and convenience stores in the United States.
Quality (2/5)
Murphy’s revenue since its spin-off in 2013 has shown no reliable trend. Revenue was around $14B in 2018-2019, dropped to $11B in 2020, and was $23B in 2022. Revenue in 2013-2014 was $17-18B. It comes out to a low-single-digit compound annual growth rate. If I was writing this in 2020, I would have said Murphy has no ability to grow sales.
The recent 70%+ growth does not seem sustainable, in my opinion, since sales closely track U.S. retail gasoline prices which have declined recently.
Here is what management said in its Q3 2023 earnings call regarding sustainable growth:
By now, the various scraping services and bots will have automatically generated their quarter-over-quarter headlines about lower revenues and profits without any insight into the price of gasoline, the structure and direction of the commodity market, the evolution of industry structure or the relative advantage amongst competitors. And we too could spend a lot of time this morning discussing this year's third quarter results compared to last year's record results, but we don't think that's especially helpful. What is helpful and important for investors to understand is that third quarter performance has evolved from an extraordinary set of conditions in the prior year, what we previously described as a once in every 6- to 8-year price drop to sustainable and durable financial performance in 2023. And to be sure, we do not expect full year results in 2023 will exceed those of 2022, but that really shouldn't be news to anyone except the bots. Instead, we believe investors should be focused on 2 fundamental questions: -- what is the sustainable trajectory given the advantaged competitive positioning of the Murphy USA business model in the years ahead and how does the current momentum and initiatives underpin and support that view.
This reminds me a bit of Casey’s General Stores CASY 0.00%↑ , which I have owned in the past and followed for many years. The simple view would always be “sales declined, that is bad”. But there would be more to the story. They could grow earnings strongly over time despite unpredictable sales.
Our sustainable trajectory and current momentum reflect 3 unique and differentiated value drivers. Channeling the advantage generated from heightened fuel volatility into value for a growing customer base to sustain gallon growth and market share gains, optimizing the in-store performance of the existing network while transforming the future network to efficiently deliver new and innovative offers, and investing in distinctive capabilities to accelerate customer trial and adoption to enhance returns on capital. Starting with fuel, one of the greatest sources of value in our business is derived from underlying price volatility, whether created by large-scale macroeconomic or geopolitical price shocks or refining and logistics disruptions or supply-demand imbalances. In the current environment, the macro setup continues to be a headwind for our customers as higher volatility at higher price levels with persistent inflationary pressures means Murphy USA has more and more value-seeking customers trading down to our stores. This benefit accrues to us at the expense of the marginal players who in this environment are themselves forced to raise prices perpetuating the cycle that drives fuel breakeven requirements higher for the industry and shift gallons and market share to value-oriented retailers like Murphy USA.
There is a lot of jargon in there, but I think the takeaway is that Murphy can keep growing LSD in the long-run because it can maintain lower prices than nearby gas stations. Add in margin improvements and a large share buyback and one can get nice earnings per share growth over time. Management calls this its “virtuous cycle”.
The US accounts for 100% of revenue. Murphy began paying a small dividend in 2020 and could grow it double-digits annually. Leverage is very high at 5X, as measured as total assets / total equity.
Visibility (2/5)
The only aspect of Murphy’s revenue that seems to be recurring in nature is its cigarette sales since that is an addictive product. The company has its Murphy Drive Rewards program to encourage repeat sales. Otherwise, retail fuel sales are constantly fluctuating due to numerous macroeconomic factors, making forecasting extremely difficult. We saw oil prices go negative during the pandemic and then quickly go over $100/barrel as wars broke out across Europe and the Middle East.
A big question regarding visibility has been if the current high level of fuel margins can continue. Here is Murphy’s CEO on the Q2 2023 earnings call:
Some investors and even analysts have been reticent to believe that higher margins are sustainable, and they wanted to see the results in a more normal period. Well, following three years of macro uncertainty and onetime events, there was absolutely nothing remarkable about the environment in Q2.
In fact, the only thing you may find remarkable about the quarter is that we are once again reporting all-in fuel margins on the high end of our range at $0.295 per gallon. In recent months, more investors and analysts have asked me, "Are we really still debating higher fuel margins?" My answer, of course, is, no, we are not. There is no internal debate at Murphy USA. The answer to us appears quite clear.
Overall, I think the idea of gas and cigarettes seems like a rather boring and simple business. However, the inner-workings of this business are complex. Just look at how many words and TLAs Murphy’s investor relations team uses on its slide show presentations to describe its business and trends. Here is just one slide I picked out as an example:
Murphy should hire someone from Watsco’s investor relations team to simplify the way they describe their business!
Management (5/5)
Murphy’s management team gets high marks. The CEO is Andrew Clyde, who has been in the position since Murphy’s spin-off in 2013. CFO Mindy West has also been in the position since 2013. Management generated about $2.3B in free cash flow (FCF) cumulatively over the last decade, while spending $641M on one acquisition (QuickChek), and $2.7B on share repurchases.
One can see how Murphy splits its spending on organic growth and share repurchases from this bit in the 10-K:
We have acquired through share repurchases approximately $2.7 billion of our common stock in a little more than nine years of operation. During the year 2022, we repurchased a total of 3,328,795 common shares for $806.4 million, for an average price of $242.24 per share. Repurchases in 2022 were made pursuant to our now completed $500 million 2020 authorization and our $1 billion 2021 authorization. As of December 31, 2022, we had approximately $213.7 million remaining under our 2021 authorization. Additionally, in order to provide a consistent and meaningful return of capital to shareholders independent of share repurchases, we raised our quarterly dividend three times during 2022 from $0.29 per share in Q1 2022 to $0.35 cents per share, or $1.40 per share on an annualized basis as of Q4 2022.
We expect to build up to 45 NTI locations and up to 30 raze-and-rebuilds in 2023 and are targeting up to 55 NTI and up to 25 raze-and-rebuilds per year in future periods, focusing on high-return locations either in high traffic areas, near Walmart Supercenters as a complement to higher performing existing stores in smaller markets, or by strategic infill in our core market areas complemented by our supply chain capabilities. While we were previously focused on smaller store size, we now expect to build more Murphy branded NTI stores that are 2,800 square feet or larger, as well as our NTI QuickChek branded locations in their existing footprint, which average between 5,000 to 7,000 square feet in size. Our real estate development team works to maintain a multi-year pipeline of projects that supports continued ratable expansion in these high-return locations.
Murphy recently announced another $1.5B of share repurchases available through 2028.
I calculate Murphy’s return on invested capital (ROIC) to be around 20%, more than double my estimated cost of capital. Stock-based compensation is insignificant. Insiders own close to 10% of shares outstanding, which is nice to see!
Demand Creation (3/5)
I do not believe Murphy has much demand creation ability. Retail gasoline is mostly the same at any gas station and is highly competitive on price. I know some stations claim their gasoline has special cleaning agents and make your engine last longer, but for the most part, gasoline is gasoline. Murphy can drive people to its gas stations by keeping fuel prices lower than competing stations nearby. This brings more people into its convenience stores to buy cigarettes and other merchandise. I do not see any reason to believe that Murphy’s gasoline is better than others besides it being sold at a better price. Some areas that are rural may only have one or two choices for gas, which would make a store much more essential to customers.
Murphy had a good strategy to locate the majority of its stores near Walmart which drives significant traffic. The company has a size and scale advantage when it comes to sourcing its fuel at a lower cost than competitors. Switching costs can be high for customers on a tight budget. They may not be able to fill up with as much gas if they go to a higher-priced gas station. Murphy has high switching costs when it comes to its merchandise since it sources 74% of its merch from Core-Mark.
Pricing & Value (3/5)
Attached below is my discounted cash flow (DCF) analysis. Feel free to download the spreadsheet and enter your own assumptions!
I set revenue to be flat over the next few years. It looks like revenue will decline 5-10% this year and potentially recover next year, but again, it is hard to say. In the long-run, I set revenue to grow LSD. Margins should continue to expand as the whole retail fuel industry sees improved margin structure. My estimated value per share comes out to $274.
For pricing, MUSA stock looks reasonable.
As seen in the Koyfin chart at the top of this post, MUSA’s mean forward P/E is 17X. The current forward P/E is 14X, which is one-standard deviation below the mean. That makes sense given the unsustainable growth in recent years. Given the cyclical nature of this business, the multiple should expand while earnings flatten out or decline.
MUSA is also in the middle of the pack compared to its peer group. I put some specialty retailers in the group, along with another gas station & convenience store operation (Casey’s), plus some retail fuel / oil & gas companies. I think a 16X P/E on $25.00 of earnings per share would be fair, leaving a $400/share price.
BP recently bought Travel Centers of America for $1.3B, expecting $800M of EBITDA by 2025. Compare that to Murphy, which is expected to have $1.0B of EBITDA by 2025 and is trading at a $7.8B market cap today.
Could it make sense for Walmart to buy Murphy to better compete with Costco on a membership plan?
Combining my valuation and pricing, I get a buy below price of $337 compared to today’s price of $369. I am not sure I would want to buy this one after reviewing my criteria. I owned Casey’s (CASY) in the past and would rather own that one again one day.
Risks
One risk is the obvious environmental and health risks from selling gasoline and cigarettes. Murphy’s is not, in general, helping when it comes to carbon emissions and cancer-causing products. Some investors may flat-out reject this stock due to its implications on climate and health, which may reduce the potential pricing multiples in the future.
Murphy’s CEO noted that there is a risk to the whole retail fuel market that the government could introduce price controls. Imagine the President or someone else tweeting that retail fuel margins are out of control and need to be reined in. While that seems unlikely, it could temporarily hit gas station stocks.
Next, there is a long-term unknown in regards to electric vehicles and charging stations. I recently rented a Polestar electric car in Los Angeles and the charging experience was absolutely awful. In short, the chargers are nearly all broken or in use, are all in weird spots in the back of parking lots, and all have no comforts, like a roof over the chargers or a store/bathroom to wait in. There should be some opportunity here for gas stations to install chargers, which will drive people into their stores to buy merchandise while they wait. Murphy could install chargers and add food using its QuickChek acquisition. What is unknown is how many people will really need charging stations when you can charge at home for most drives. Murphy’s says EV penetration is low in the areas it serves and the charging economics are poor today, so an investment in this does not make sense. It would be unfortunate if Murphy spent years buying back billions of its own shares instead of investing in alternative fuel sources and then missing the boat. This risk is probably 10-20 years too early, so that is enough about that.
Finally, I have some concerns that returns on investments will be lower over the next few years due to higher costs for employees, transportation of gas, credit card fees, and merchandise. According to the 10-K, Murphy’s stores only require one or two associates and 76% of stores are located on company-owned property, which should reduce inflation risks.
To conclude, Murphy USA scores a 15/25 in my latest review of the company. See where it stacks up with the other companies I follow, now on Tableau!
Thank you for reading! Please share your thoughts below.
Other great posts covering Murphy USA:
Disclosure:
I do not own MUSA stock. Please see my holdings disclosure located in the Google Sheets link.
Any views or opinions are my own. I do not represent a firm. I am not giving financial advice. The stocks that I write about could increase in value, lose value, or stay the same value. Investing involves risk and losses can occur. Some stocks I write about may not be appropriate for you and you should consult a professional investment advisor. Data presented is from sources I believe to be reliable. The opinions and commentary presented reflect my best judgement at this time and may include “forward-looking statements”, all of which are subject to change at any time without obligation to update them. Actual future results may be different than my expectations.
This post and the information presented are intended for informational purposes only. The views expressed herein are the author’s alone and do not constitute an offer to sell, or a recommendation to purchase, or a solicitation of an offer to buy, any security, nor a recommendation for any investment product or service. While certain information contained herein has been obtained from sources believed to be reliable, the author has not independently verified this information, and its accuracy and completeness cannot be guaranteed. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, timeliness or completeness of this information. The author assumes no liability for this information and no obligation to update the information or analysis contained herein in the future.