Bull/Bear Report : CASY - No general consensus on Casey General Stores

These weekly bull/bear articles have been a pleasant surprise for me. With each week's selection, I am always surprised to learn something new and informative that helps me determine valuation.

I may not always agree with the opinions here, but that is exactly the point.

In the case of this week's selection of Casey's General Stores, Inc. (CASY) my valuation was solidified with some of the views expressed by bloggers.

Specifically, it never dawned on me that convenience stores may see increases in sales due to high gasoline prices. The thought being that the cost to save a dime by driving further to a big box store would negate any benefits.

Thus, we should see more volume at the local convenience store that can charge a bit more for that convenience. The best part of such behavior is that it becomes habitual. Even if oil prices subside consumers may prefer buying milk for the convenience and reduction in carbon footprint.

CASY has already done a good job at managing during these difficult times. They are controlling expenses and look to exploit their some 3,000 food and non-food items. Eliminating credit card usage would be another way to save.

I like CASY as a back door way to play the rise in oil prices. It may take a year or more for the bubble in crude to subside. If so, CASY has a fair amount of time to exploit consumers that have no choice but to buy from the store that they can walk to.

Here are your opinions:

The Bull Case - toroandbruin

I wish there were a Casey's General Store here in Colorado so I could visit one. In spite of their aggressive growth plans, they haven't reached the Rocky Mountains yet; so I'll have to rely on financials when deciding whether to invest. They look reasonable to me despite their profit-margin drop recently due to the price of gas. Oddly, the stock price has recently surged despite their announcement of more modest profits. Perhaps investors were heartened by the fact that at least they still HAVE profits and a dividend. In addition, they have a both a DRIP and a Direct Purchase Plan which is a good investor relations move.

I'd like to compare Casey's with 7-Eleven but unfortunately the latter is private. Looking at "Competitors" in Yahoo and Google finance, larger companies such as Kroger, Safeway and Winn-Dixie are listed. IMHO that is comparing apples to oranges because the customers are different. A few years ago, I read an article about convenience stores that said most of the food products sold there were consumed minutes after being bought. It is the store of preference for laborers who need to fill up the truck with gas and fill up themselves with food as quickly as possible between tasks. I can confirm this because my boss owns both the investor relations firm I work for and also a small landscaping/snow-removal company. The company credit cards are used for gas and food-on-job.

Casey's offers a MasterCard, with no annual fee, good for rebates on everything but higher on items bought at Casey's (including gas). If they were in this area, would my boss get the card and mandate using Casey's? 7-Eleven recently introduced a credit card but offers no details on their Website about possible savings when buying their products. In 7-Eleven's favor, they sell money orders and prepaid phone cards, including an international one. Unfortunately they don't give details on long-distance rates; however if they have exceptionally good rates to Mexico that is another point in 7-Eleven's favor as a competitor. The biggest question is where the customer can get the most bang for the buck.

Casey's is somewhat different from other convenience stores per the company description at Reuters. "The Company's General Stores seek to meet the needs of residents of small towns by combining features of both general store and convenience store operations.... Each Casey's General Store typically carries over 3,000 food and nonfood items. The products offered are those found in a supermarket, except that the stores do not sell produce or fresh meats and selection is limited to one or two well-known brands of each item stocked."

This looks like a good niche to me. When the landscapers I mentioned did a job in the mountains last summer they barely broke even due to costs. They had the choice of spending an arm and a leg eating at higher-priced tourist restaurants or spending a lot on gas to get to a grocery store. (Better planning would have helped, of course; however, being used to city and suburbs, they were surprised by the rural environment.) Hometown Mom and Pop stores have disappeared because they cannot compete in pricing. In spite of gas costs, rural residents will save money driving to the supermarket in the nearest large town. Although with rising oil prices this may no longer be true, the Mom and Pops are long gone! I am betting that Casey's has the right idea at the right time. Of course competition will move in but Casey's has a good head start.

The Bear Case - Jim Van Meerten

I'm not as high on Casey (CASY) as the rest of the market is right now. Casey has experienced some positive price movement mainly on the theory that if gas prices are going up the retailers must be making a killing. Let's look at Casey's own press release on their annual results.

Although sales dollars were up the actual gallons of gas sold was only up 1.8% - not an impressive growth rate. Credit card companies are increasing their fees so the margins will be squeezed. As gas prices go up this will increase operating expenses. There is a shift to charging gas - increasing credit card fees - instead of paying cash further squeezing gas margins.

While we're mentioning operating expenses, Casey's operating expenses rose 15.6 percent - much higher than the inflation rate.

Casey failed to execute their published expansion plans. They projected to acquire 50 new stores but only bought 12. They wanted to build 10 but built none.

What about the convenience store portion of the business? We all know that convenience store prices are higher than the supermarkets. They count on impulse sales. As the public tries to cut back on driving there will be fewer trips to the gas pumps and fewer visits will be made to the inside of Casey.

Long range - Number of gallons sold will probably decrease causing fewer customer visits. Higher operating cost, failed expansion plans, and more customers using credit cards instead of paying cash will squeeze gross margins. They failed to achieve their own grow in the number of locations - no projected increase in market share. What's to like about next 6 months?

I believe CASY is a reasonable speculation here with the main reason being an unexpected increase in convenience purchasing by those conserving gas. Sometimes crisis brings unintended consequences.

In the case of CASY that consequence may be an increase in sales.

Jamie Dlugosch
Executive Editor, InvestorPlaceBlogs

by The Freshman |  06/27/08  |  Stocks: CASY,