Murphy USA Stock Turns Slow And Steady Growth Into Big Share Price Gains (NYSE:MUSA)

Thesis

It’s now been just over 10 years since Murphy USA Inc. (NYSE:MUSA) was spun off and became publicly traded. While its revenues and earnings have not been exciting, the share price has been for medium and long-term investors.

Earnings for 2024 are expected to rise by mid-single digits, but share price gains should be more impressive.

About Murphy USA

The company operates more than 1,700 gas bars, most with attached convenience stores. Its brands are Murphy USA and Murphy Express (1,577 locations), and QuickChek (156 locations), according to its fourth quarter and full-year 2023 earnings release.

Expect the Murphy Express (kiosks) brand to disappear in the near future as the company rebrands them as Murphy USA. The company also sells fuel to unbranded wholesale customers, out of its own terminals.

It was incorporated in 2013, after being spun off from the Murphy Oil Corporation (MUR). QuickChek was acquired in 2021, with the aim of enhancing its food and beverage capabilities.

Almost all of its locations are adjacent to or near Walmart Inc. (WMT) locations. Not surprisingly, then, Murphy USA has positioned itself as a low-cost enterprise. Specifically, “We are an independent publicly traded company, with low-price, high volume fuel retail outlets selling convenience merchandise through low-cost small store formats and kiosks, as well as larger format stores that have a broader range of merchandise and food and beverage offerings which are driven by key strategic relationships and experienced management.”

Murphy USA operates in 27 states across the Southwest, Southeast, Midwest, and Northeast United States.

For the full year 2023, petroleum product sales contributed $17.1 billion to total revenue, while merchandise sales contributed $4.09 billion, and other operating revenues provided $335.7 million.

With a share price of $407.39 at the close on February 22, the company had a market cap of $8.25 billion.

Competition and competitive advantages

Murphy USA reported in its 10-K for 2023 that the petroleum business is highly competitive. It said firms compete mainly on price, but convenience and consumer appeal are also factors.

The competition with other companies works in two ways: first, to access petroleum products (it does not have its own refineries) and second, in marketing to consumers.

Turning to competitive advantages, it observed in the 10-K that much of its edge arises out of proprietary arrangements regarding its product supply and wholesale assets. Those arrangements include pipeline positions and product distribution terminals.

The most obvious competitive advantage, to me, at least, is its Walmart adjacencies, giving it access to vast amounts of traffic that is available to few other fuel retailers.

It is also a high-volume, low-cost operator in a market that prizes low prices. In addition, “Our low cost operating model translates into a low cash fuel breakeven requirement that allows us to weather extended periods of low fuel margins and which has improved by more than 3 cents per gallon (“cpg”) since our spin-off in 2013.”

Margins

If these competitive advantages are strong, we should also see robust margins, at least compared to its competitors. Murphy USA ’s margins [TTM] are gross 7.04%, EBITDA 5.50%, and net 2.89%.

One direct competitor is Alimentation Couche-Tarde Inc. (ATD:CA), a Canadian-based firm that operates in North America, Europe, and Asia. Its brand names include Circle-K, Couche-Tard, Holiday, Ingo, and Mac’s. Its margins are better: gross 17.82%, EBITDA 7.76%, and net 4.48%.

Where Murphy USA outshines Couche-Tard is in its return on common equity, with the former posting 75.78% and the latter clocking in at 23.68%. Why the advantage to Murphy USA here? Consider this chart with its steadily rising share price:

Murphy USA’s share price rose from about $40.00 at the end of February 2014 to over $400.00 at the close on February 22, 2024. That’s what legendary fund manager Peter Lynch would call a 10-bagger.

Growth

Behind the growing share price are growing revenue and EPS, especially since 2020:

In its 10-K, Murphy USA wrote that its business strategy includes “planned growth and efficiency initiatives” that allow it to control its overhead costs, support improvements in store returns, and keep costs properly scaled as it grows organically.

The development of new stores remains a solid source of top and bottom-line growth. In 2024, it expects to build 30-35 new stores, which is up from 28 in 2023. Each year, it also undertakes what it calls Raze-and-Rebuilds, which replaces high-performing kiosks near Walmart Supercenters with 1,400 square-foot walk-in stores. It aims for 35 – 40 conversions this year.

These builds and conversions obviously require capital expenditures, which Murphy USA is making. For 2024, it plans capex of $400 million to $450 million, which is up significantly from its $344 million in 2023.

Speaking of growth, the firm’s capital allocation strategy includes double-digit dividend increases “over time”. In 2023, it increased the dividend by 11.7% to $1.64 annually. As of February 22, the yield was 0.42%, which is reasonable for a growth company.

The six analysts who cover Murphy USA expect its EPS to remain relatively flat over the next three years:

• 2024: 5.21% growth
• 2025: 5.53% growth
• 2026: minus 5.13%

At the same time, they see little movement in the share price, forecasting an average price target of $411.00 at the end of this year, an increase of just 0.89% on the February 22 closing price of $407.39.

Why, then, are they bullish in their ratings, with three Strong Buys, one Buy, two Holds, and one Sell? Let’s look at a 10-year price return chart, and compare it with S&P 500:

If you’re a growth investor, you will want to buy Murphy USA if you have a long-term perspective, say five to ten years. This is not a short-term trading stock.

Management and strategy

President, CEO, and Director Andrew Clyde was a leader of Booz & Company’s global energy practice before joining Murphy USA. He has led the firm since it went public in 2013, and has had management consulting experience with downstream and midstream energy companies, large, independent convenience store chains, and various small box retailers.

Galagher Jeff was hired recently to serve as Executive Vice President and Chief Financial Officer. He has also held leadership positions at Dollar Tree, Inc. (DLTR), Advanced Auto Parts, Inc. (AAP), and Walmart Inc. (WMT).

Murphy USA has a five-part business strategy:

1. Grow organically: its real estate development team keeps a multi-year pipeline of high-return locations.
2. Diversified merchandise mix: evaluating its remaining kiosk locations for opportunities to upsize them into Murphy USA stores.
3. Maintain its cost leadership position: part of its low-price, high-volume approach.
4. Create advantages from market volatility: investments in “capabilities and asset positions” that support its supply chain strategy and pricing advantages.
5. Invest for the long term: the company says it keeps a portfolio of mostly fee-simple (no strings attached) assets and an appropriate debt structure. These tactics are expected to make the company resilient during periods of volatility in fuel prices, demand, and margin.

Given Mr. Clyde’s leadership through the company’s growth in the past five years, and the company’s returns to investors, the management team has the strength it needs to stay on its current trajectory.

The business strategy has served the company well in the past, and appears to be suited for future growth.

Valuation

Most valuation metrics for Murphy USA are positive and indicate the company is slightly undervalued to fairly priced.

The PEG Non-GAAP [FWD] ratio is 0.51, which indicates undervaluation. EV/EBITDA [FWD] is 9.68, which puts it slightly under the 10.00 mark. Price/Sales [FWD] is 0.38 and also indicative of undervaluation. Price/Book, on the other hand, is 8.46, which suggests the firm is overvalued.

With the exception of the Price/Book ratios, all Murphy USA ratios are below those of the Consumer Discretionary sector medians.

Based on this information, I’m going to assume the shares are fairly priced.

As for what to expect in the future, we have a couple of competing narratives. First, there is the steady, upward progression of the share price. As we saw above, the share price has risen roughly 10-fold over the past decade; that’s a compounded annual growth rate, or CAGR, of nearly 26% per year.

Second, the analysts’ average price target is $411.00, which is just 0.89% higher than the February 22 closing price of $407.39:

That’s somewhat in line with the 5.21% earnings increase they expect this year, but far from the 26% that the company has averaged over the past 10 years.

I’m going to roughly split the difference between the 5.21% and the 26%, and estimate the share price will grow another 15% this year. That would take it to $468.50, a $61.00 increase in just over 10 months. It’s also very close to the high end of the analysts’ target range.

On that basis, I’m going to rate the stock a Buy. Two other SeekingAlpha analysts have issued ratings in the past 90 days, one a Buy and the other a Sell.

The SeekingAlpha Quant system gives a Buy rating, while the Wall Street analysts give three Strong Buys, one Buy, two Holds, and one Sell.

Risks

Murphy USA carries $1.70 billion in long-term debt, and as it acknowledged in its 10-K, “We have debt obligations that could restrict our business and adversely impact our financial condition, results of operations or cash flows.” On the assets side, it has $124.9 million in cash, cash equivalents, and short-term investments. During the earnings call after the Q4-2023 earnings report, EVP and former CFO Mindy West said, “I think we’re fine with the leverage levels that we have, that we have plenty of access to liquidity, and additional capital if we need it.”

While the company seeks to exploit volatility in global oil prices, changes in the depth and direction of oil prices are beyond its control. And it does not hedge, except in limited cases.

Since most of its stores carrying the Murphy USA name are located close to Walmart Supercenters, it is important that it remain on good terms with the retailing giant. It notes in the 10-K that any deterioration in that relationship could have adverse effects on the operations of its stores. For example, if it chooses to sell properties leased from Walmart, then Walmart has the first right to purchase at market value.

Its articles of incorporation allow it to issue one or more classes of preferred stock, without approval from shareholders. This could lead to reduced voting power or a dilution in the value of common shares.

Public shareholders have little influence as it is. They own only 8.76% of the shares outstanding, meaning they are unlikely to have much of a voice at the boardroom table. Institutional investors own 82.22%, individuals and insiders own 8.93%, and 0.09% are state-owned.

Conclusion

I’m a fan of companies with price charts that rise steadily year after year, and that’s what Murphy USA has done for the past 10 years. Building on its low-cost, high-volume business model, it keeps growing its store count, its revenue, and its earnings.

Watch for more of the same in coming years. Even though its earnings growth looks slow, investors are bidding up the share price more aggressively. I expect the price to grow by about 15% this year, and have rated it a Buy.