$CASY: With New All-Time Highs, Is It Still a Buy?

It was another solid week of gains for the U.S. stock market indexes as Nvidia earnings poured fuel on the bulls’ fire. The best-performing industries are internet & direct retail, food retail and paper products.

Considering the different perceptions of the stock, this time TigerPicks chose $Casey's General(CASY)$ to have a fundamental highlight to help users understand it better.

$Casey's General(CASY)$

Casey's General Stores is the third-largest convenience store chain in the US and the fifth-largest pizza chain.

The company's focus on smaller towns allows for cheaper operations and establishes brand loyalty. Casey's has experienced strong growth in revenue and EBITDA, driven by its acquisition strategy and private label products.

Why $Casey's General(CASY)$?

Casey's General Stores is unique in the sense that it operates mostly in the midwestern United States like Ohio, Michigan, Indiana, Wisconsin, Illinois, Minnesota, Iowa, Missouri, North Dakota, South Dakota, Nebraska, and Kansas. Importantly, it primarily serves towns with fewer than 5,000 people. About half of its stores fit that criteria. This is an advantage for the company in that these locations are cheaper to build out as well as acquire and operate.

It also has the advantage that since there's often less retail options, Casey's General Store's becomes a place where customers can buy things outside of what may be conventional items at a convenience store compared to a typical location in an urban area, for example. Operating in smaller towns also has the advantage of being the primary store in the area which leads to familiarity by the residents and customers who live in the community. Being rooted in the communities it serves also establishes brand loyalty and repeat business.

One of the things that first impressed me about Casey's General Stores has been its share price outperformance over time. When looking at the chart below, we can see that the company has returned a 330.5% return for shareholders over the last 10 years, compared to the S&P500's return on 159.7%.

Chart

This outperformance has been driven by strong growth in revenue and EBITDA, which have grown at a CAGR of 9.6% and 15.9%, respectively, over the last decade. Over the last 20 years, since 2003, revenue and EBITDA have compounded at 23.0% and 19.7%, illustrating that the company has been able to put up consistent increases in both sales and earnings over the long-term.

Revenue and EBITDA Growth

Revenue and EBITDA Growth (Author, based on data from S&P Capital IQ)

Part of the reason for this excellent growth over the last few decades have been directly as a result of the company's acquisition strategy.

The convenience store industry is a highly fragmented market. There's only a few major players, like 7-Elleven and Alimentation Couche-Tard who are first and second largest players and have thousands of stores. With consolidation being a major theme in the industry, as larger operators can achieve economies of scale and optimize supply chains, this has made smaller convenience stores very attractive targets to buy. In the last decade, Casey’s has acquired 418 store with 259 of these being acquired in just the last three years.

Industry Consolidation for Casey's General Stores

Industry Consolidation (Investor Presentation)

Like Casey's General Stores, while both 7-Elleven and Couche-Tard have put up fantastic growth in store count over the years, part of the reason I like the way Casey's is strategically positioned is due to the fact that they are now focusing more on convenience stores and less on fuel. As selling fuel is a lower margin business, Casey's focuses less on fuel with around 75% of inside transactions not including fuel.

Another key differentiator I view as important is the company's private label. As is true for major grocery chains, private label is important for convenience stores like Casey's as they provide a value alternative for guests and also help to build brand loyalty. With around 350 SKUs at Casey's being margin accretive, it has about 120 SKUs that are unique to Casey’s.

Finally, an exciting part of the business growth here that I don't think the market is paying attention to is the delivery capabilities Casey's will have going forward. With ordering food online becoming increasingly popular as a result of the rise of DoorDash (DASH) and Uber Eats (UBER), Casey's is now offering delivery in about 10% of stores (around 250 stores).

With around 80% of guests agreeing “Casey’s is a good value for the money", I wouldn't be surprised to see deliveries act as a source for organic growth going forward. If they're successful in the 10% of stores they're in now, it wouldn't be far-fetched to think that they could easily up that number pretty quickly. Right now, delivery is a mix of the delivery is being done themselves with the rest being third-party companies, so Casey's doesn't see labor issues with respect to getting drivers. Using third-party companies is also great as Casey's pay per delivery which doesn't require a company-employed driver to be waiting around for the next delivery.

Long Dividend Track Record

The company has a pretty impressive dividend streak with more than 30 years without a reduction and even increased it during the Great Financial Crisis. And seeing by the company's financials, the dividend remains safe and likely to grow for the foreseeable future.

They raised the dividend by double-digits in 2023 from $0.38 to the current $0.43 but still currently yield less than 1%. And this is well-covered by growing, stable cash from operations and free cash flow. Cash from operations grew roughly 10% from FY21 to FY23, while free cash flow grew roughly 12% during the same period.

Free cash flow during the latest quarter was $146 million, up from $115 million a year prior. So, despite the challenging backdrop, CASY managed to grow their free cash flow by nearly 27% year-over-year.

Cash from operations also grew to $253 million for the quarter and was up in the 6 months ended from $290.4 million to $328 million. EPS for the quarter was $4.24, significantly out-earning the regular dividend. This was also up double-digits from the year prior at 16%.

In one quarter, CASY out-earned the annual dividend payout of $1.72 by a sizable margin, giving them a very low payout ratio. This is something I like to see from dividend paying companies as it not only gives them room for further increases, but a lower risk of the dividend being cut if the company faces temporary financial hardship.

Their free cash flow payout ratio is also conservative giving them a (payout ratio) in the teens at less than 11% considering the 37 million shares outstanding. This means the company only needs roughly $16 million in free cash flow currently to cover the dividend and roughly $64 million on an annualized basis.

Over the last 3 years the company has brought in $410 million in free cash flow on average, so they have plenty of room to continue growing the dividend. And this is expected to be $1.25 billion by FY2026, more than double in roughly 2 years.

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

Based on 9 Wall Street analysts offering 12 month price targets for Casey's General in the last 3 months. The average price target is $302.56 with a high forecast of $340.00 and a low forecast of $263.00. The average price target represents a 0.94% change from the last price of $299.75.

Resource:

https://seekingalpha.com/article/4663021-caseys-general-stores-despite-new-all-time-highs-still-a-buy

https://seekingalpha.com/article/4672761-caseys-general-stores-casy-stock-dividend-grower-worth-owning-long-term-investors

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