U.S. convenience chain seeks further growth after resisting takeover bid

Pat McKeough responds to many personal questions on specific stocks and other investing topics from the members of his Inner Circle. Every week, his comments and recommendations on a selection of the most intriguing questions of the past week go out to all Inner Circle members. And every Friday, we offer you one of the highlights from these Q&A sessions.

This week, one Inner Circle question concerned a potentially fast-growing stock market investment, convenience store chains. Pat looks at how one U.S. chain is doing following its successful fight to resist a takeover bid from a big Canadian chain.

Q: What are your thoughts on Casey’s General Stores as an investment? Thank you.

A: Casey’s General Stores, (symbol CASY on Nasdaq; www.caseys.com), operates over 1,700 convenience stores under the Casey’s General Store and Just Diesel brands.

The company’s stores are located in eleven Midwestern states, but they are mainly concentrated in Iowa, Missouri and Illinois.

Casey’s gets 71% of its revenue by selling gasoline, but its stores also offer food, including freshly prepared pizza, donuts and hamburgers, as well as beer and other beverages.

In the three months ended October 31, 2011, Casey’s revenue rose 32.1%, to $1.8 billion from $1.3 billion a year earlier. Earnings jumped 73.5%, to $37.6 million from $21.7 million. Earnings per share rose 94.1%, to $0.99 from $0.51, on fewer shares outstanding.

However, if you exclude the $0.30 a share that Caseys spent to fend off a hostile takeover bid a year earlier, its earnings per share would have been $0.81 in the year-earlier quarter.

Stock market investment: Caseys looks to expand in three Southern states

Casey’s holds cash of $86.2 million, or $2.24 a share. Its long-term debt of $673.5 million is a reasonable 32.1% of its market cap. The shares yield 1.1%.

Casey’s earnings have lagged behind its revenue growth lately, because strong competition for cigarette sales has hurt its profit margins. It is also paying more for food ingredients, including cheese, coffee beans, flour and meat.

The company has lots of room to expand by purchasing smaller chains and opening new stores. For example, it now plans to build a number of new stores on its recently purchased land in Arkansas, Kentucky and Tennessee.

Casey’s shares are up 54% since March 2011. Even so, the stock trades at a reasonable 15.0 times this year’s forecast earnings of $3.60 a share.

In the latest Inner Circle Q&A, Pat examines Caseys prospects in light of the potential risk of its acquisition policy. He also looks at whether it can boost its profit margins in an improving U.S. economy and gain from its plan to favour prepared food over fresh food. He concludes with his clear buy-hold-sell advice.

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