Casey’s General Stores, Inc. (NASDAQ: CASY) reported impressive 4Q FY 2024 (quarter ended April 30, 2024) earnings last week: EPS of $2.34, up from $1.49 in 4Q FY 2023, and well above analysts’ consensus forecasts of $1.72.  In turn, CASY shares jumped 13.2% last week, making it one of the best performing U.S. stocks on the week.

The fifth largest convenience store chain in the U.S., CASY is an institution in many areas of the Midwest, especially in rural America.  CASY sells gasoline and diesel fuel at almost all its 2,600+ stores in 17 states, but the attraction for many of its customers is the tasty pizza it makes from scratch in its in-store kitchens.  Based on the number of its locations, CASY would be the fifth largest pizza chain in the country, just behind the 3,180-unit Papa Johns Pizza restaurants.

Pizza is just part of CASY’s high margin “inside transactions” which include other prepared foods and groceries.  Inside sales increased 5.6% year-over-year in 4Q FY 2024 and 4.4% over the full year FY 2024 (the twelve months ended April 30, 2024), and inside sales seem likely to growth in this 4% to 5% range for some time.  Importantly, CASY’s inside sales -- driven by its pizza, other prepared foods, private label brands, and strong cost controls -- are quite profitable.  More specifically, its 40+% gross margin on inside transactions is at least 600 basis points higher than other comparable convenience store chains.

This, together with solid margins on fuel sales, has translated into CASY’s reaching $1.06 billion in EBITDA in FY 2024.  Furthermore, the company projects long-term annual EBITDA growth of at least 8%.  Such growth seems achievable given the favorable characteristics of CASY’s customer base.  About three-quarters of CASY’s consumers earn more than $50,000 per year, which represents considerate purchasing power in the states in which the company operates.  The most expensive state in which it operates (Wisconsin) was ranked 26^th among U.S. states in terms of the cost of living in the third quarter of 2023.    Even if the economy were to weaken, CASY’s customers would seem likely to continue to favor the company’s low-cost prepared food.

CASY is an aggressive purchaser of other convenience stores that fit within its desired Midwest geography, particularly chains which have little local competition.  Indeed, CASY has added more than 1,000 stores since 2010.  Small convenience stores typically sell out primarily because it becomes increasingly difficult for them to compete with the buying power of large chains like CASY.  The economics of store acquisitions is quite attractive for CASY.  Typical takeout multiples are in the 6x-9x enterprise value (EV)-to-EBITDA range (pre-synergies); in contrast, CASY trades at an EV-to-EBITDA multiple of around 14x.  The EBITDA of the acquired properties simply receives a higher multiple under CASY’s banner.

Of course, if, going forward, CASY were to find it difficult to find suitable acquisition targets, such a development would not necessarily be a bad one for shareholders.  The company generates substantial free cash flow -- $370 million in FY 2024 and $405 million in FY 2023 -- and much of the capital initially targeted to buy stores would likely be shifted to more aggressive stock buybacks.  In FY 2024, CASY repurchased nearly $105 million of its own shares.

At about a 25x P/E multiple based on forward year earnings and an 14x EV-to-EBITDA ratio, CASY stock trades at a moderate premium to the S&P 500 Index.  This premium could further expand given CASY’s entrenched market position in its operating regions, robust and predictable growth prospects, and impressive cost controls.  Simply put, it is difficult to identify a company which simultaneously: 1) has near double-digit long-term EBITDA growth potential; 2) faces limited risks; 3) and is reasonably priced.

Stocks.News does not own positions in companies mentioned.