Description

Company Background

Casey’s is the 4^th largest C-Store chain operator in the U.S. with >2,400 stores operated across 14 mid-west states. They serve small towns in rural areas (prominent in the corn belt) and are generally one of the few competitors (for both food and fuel) in the area (often co-located with Dollar General). 70% of its stores are in towns with populations of <10,000 & 56% of their stores are in town of <5,000. 2/3^rds of gross profit dollars are generated via ‘inside sales’ consisting of grocery (incl. tobacco, beer, spirits) and prepared food (pizza, donuts, fountain drinks) and the other 1/3^rd from the wholesale to retail spread on fuel. Importantly, fuel margins have been moving higher as independent operators of gas-stations are forced to price fuel higher to offset rising fixed costs (EMV compliance, wage pressure, regulatory costs, capital needs, etc.); fuel profitability is tracked as a function of cents per gallon sold. A typical store does ~$4mm split between $1.7mm of high margin consumables and $2.3mm of low margin fuel. Casey’s owns the real estate under their 2,400-store network and controls its own distribution (rather than paying McLane/Core-Mark (PFGC)). As such, Casey’s controls aspects of its operations that most other C-Store chains outsource, including fresh food prep. Most stores have a kitchen where employees prepare freshly made sandwiches, donuts, salads and pizzas. Casey’s pizza business represents the 5^th largest pizza chain in the U.S (selling more than $300M of pizza/year) and they are significantly less reliant on tobacco sales relative to a typical C-Store (which typically is a low margin business). Historically, they have grown through new store builds and acquisitions of independent operators but have become more active on the M&A front in recent periods. Targets acquisitions of smaller less sophisticated chains at 6-8x pre synergy EBITDA. EBITDA growth is a combination of SSS + GM% expansion + OpEx leverage + Unit Growth. Management has committed to 8-10% EBITDA growth CAGR through 2023.

Casey’s core customer base in the corn belt is benefitting from a robust ag economy further, the company will serve as a ‘reopening’ beneficiary as people get back into the routine of a daily morning donut and coffee and an afternoon snack (self-serve business is very high margin and was hurt by COVID). Fuel margins per gallon sold are moving structurally higher from the low-20c to the low-30c as the 60% of independent operators are forced to increase fuel prices to offset fixed costs, which directly benefits scaled low cost players who follow their independent competitors higher pricing. The new management team has been more aggressive on the M&A front (>200 stores in FY2022) and the business will be able to leverage fixed costs and scale on fuel/food procurement and distribution. The risk/reward is attractive as fundamentals inflect and there are multiple strategic and financial levers to pull in order to unlock value. 18-month price target of $275 (+33%) or 13x EBITDA (discount to 7 and i acquisition of Speedway). The company implemented a staggered board with the assistance of the Iowa State Senate bill, known as the “Casey’s Bill” after a hostile bid from Couche-Tard in 2010; because Casey’s did not have a staggered board, all of the company’s director seats were contested by Alimentation nominees at Casey’s September 2010 annual meeting. The board a phased process to declassify in FY2019; and for the most recent FY2021 annual shareholders meeting the entire board stood for election. In the event that Casey’s does not move to unlock shareholder value, it appears to be vulnerable to potential agitation. Casey’s attracted the attention of activist JCP Investment Management in 2018 – who advocated for a sale of the business.

Investment Thesis

1. Potential levers to unlock value:
1. Monetize Real-Estate: Owns substantially all its real estate (incl. 2,400 stores & 3 distribution centers). If monetized the real estate alone is worth $7B of a $9B enterprise value; no indication of interest in unlocking value but provides downside protection
2. Refranchising: Both of Darren's prior employers (IHOP & 7-Eleven) were franchised organizations. CASY has not offered franchises since 2008.
3. Outsource Distribution: Costly self-distribution could be off-loaded to a 3rd-party in order to improve efficiency and reduce cost (e.g. Core-Mark distributes for Couche-Tard) – it’s not clear that self-distribution has created much value to-date)
2. Acquisition target: Casey’s is setting up as a potential take out candidate in the next 2 to 3 years. They have been approached by Couche Tard and Seven & i in the past
1. Industry continues to consolidate; recent large deal 7-Eleven/Speedway for $21 billion for 3,900 stores ($5.4mm per store or 14x EBITDA)
3. Trading below replacement cost – TEV/Store of $3.9mm is < the $4.5mm new build cost. While new store returns are sub optimal, they are still well above the company’s cost of capital.

In the event the market doesn’t ascribe proper value there are numerous ways to monetize the current asset base Investment carries multiple ways to win on top of improving fundamentals. The hard-asset coverage via owned real estate and distribution protects the downside.

Capitalization:

Real Estate Valuation

*Cap rate assumption supported by Getty Realty (a publicly traded C-Store REIT)

Acquisition Context:

Fuel Margins

Unit Growth

Trading Multiples:

Catalyst

-Monetize Real Estate

-Buy-out

-Refranchise