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CST Brands, Casey's General Stores, Susser Holdings --

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gfp927z   Friday, 05/17/13 05:51:47 PM
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CST Brands, Casey's General Stores, Susser Holdings -- >>> Is This Valero Spinoff a Compelling Opportunity?


May 16, 2013



In the middle of April, Fool contributor Jim Royal posted quite an interesting article about Valero’s (NYSE: VLO) spinoff, CST Brands (NYSE: CST). He mentioned that he would be buying $1,000 worth of the company’s shares for his special situation portfolio. Interestingly, CST Brands have just begun trading on the market for more than a week ago. It becomes the second biggest public fuel and convenience retailer in North America. Let’s take a closer look to determine whether or not we should get into CST Brands at its current trading price.

Business overview

CST Brands operates nearly 1,880 convenience and retail stores, including 1,032 company-operated fuel and convenience stores in the U.S. and 848 retail sites in Canada, with two main operating segments: Retail-U.S. and Retail-Canada. In the past four years, the Retail-U.S. segment has generated majority of its inside revenue, around 32% to 36% of the tota, from cigarettes. Alcohol ranked second, accounting for 17%-18% of the total inside sales. CST sold around 5,083 gallons of fuel per site per day, with the average margin of $0.147 per gallon in 2012. In the Retail-Canada segment, cigarettes accounted for as high as 50% of the total inside sales. In 2012, it sold 3,340 gallons per site per day, with the margin staying at $0.233 per gallon.

Decent net debt/EBITDA

In 2012, CST generated around $1.3 billion in revenue, with the pro-forma 2012 EBITDA of $379 million. The company reported that it has spent around $455 million in capital expenditures, mainly to remodel its stores and on other sustaining activities. In 2012, the pro-forma free cash flow was around $240 million. As of December 2012, CST would have $470 million in equity, $245 million in cash and 1.05 billion in long-term debt, of which net proceeds would be distributed to Valero. However, with a decent EBITDA of $379 million, its net debt/EBITDA is not so high, at 2.12. CST is trading at around $31 per share, with the total market cap of nearly $2.33 billion. Thus, after the cash and debt are being adjusted, its enterprise value stayed at $3.1 billion. Consequently, the market values the company at around 8.2 times EV/EBITDA. Compared to its peers including Casey’s General Stores (NASDAQ: CASY) and Susser Holdings (NYSE: SUSS), CST has the lowest valuation among the three.

Casey’s General Stores is the most expensively valued

Casey’s General Stores is the operator of 1,731 convenience stores under Casey’s General Store brand name in 14 Midwestern states in the U.S. The majority of its revenue, $1.19 billion, or 71.6% of the total third quarter revenue, were generated from the sale of gasoline. Grocery & Other Merchandise ranked second with $329.7 million in revenue while the revenue of Prepared Food & Fountain in the third quarter ended March 2013 were $137 million. Its third quarter revenue increased nearly 5.3% to $1.66 billion. However, its earnings came in at $0.40 per share, a bit lower than $0.43 per share in the third quarter last year. The lower profit was due to a 12.2% rise in operating expenses. Chairman and CEO Robert J. Myers commented that the recent quarter was negatively affected by the “challenging cigarette environment”.

As of Jan 2013, Casey’s General Stores had around $733 million in debt and $27 million in cash while it generated nearly $319 million in EBITDA in the past twelve months. Thus, its net debt/EBITDA was equivalent to CST, at nearly 2.2. Casey’s General Stores is trading at $57.70 per share, with the total market cap of $2.2 billion. The market values the company at 9.33 times EV/EBITDA.

Susser Holdings seems to be the most conservatively financed

Susser Holdings is considered to be the leading convenience store operator in Texas, operating 559 convenience stores in Texas, Oklahoma and New Mexico. Motor fuel contributed the most to its revenue of nearly $3 billion, accounting for 74.7% of the total revenue in 2012. Merchandise (excluding food service) ranked second, with $766.8 million in revenue. Recently, Susser Holdings beats analysts’ expectations with its first quarter earnings results. In the first quarter 2013, revenue rose nearly 5.7% to $1.49 billion. While analysts estimated a loss of $0.05 per share, Susser Holdings has narrowed the loss to $232,000, or $0.01 per share.

Susser Holdings also employs a lot of leverage in its operations. As of December 2012, it had $389 million in equity, $286 million in cash and $607 million in long-term debt. Thus, its net debt stayed at $321 million. In the past twelve months, Susser Holdings generated $178.6 million in EBITDA, so its net debt/EBITDA was the lowest among the three, at 1.8 only. Susser Holdings is trading at $51.20 per share, with the total market cap of $1.1 billion. It is valued a bit more expensive than CST, at 8.4 times EV/EBITDA.

My Foolish take

CST does not seem to be a screaming bargain at its current trading price. I would prefer Susser Holdings the most, due to its lowest net debt/EBITDA ratio. As for CST Brands, I would prefer to see further price contraction before initiating any position in this stock.


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