MUSA - Murphy USA

[Leverage Capabilities]

Looking at Murphy USA as a short position. I think the market is underestimating how much their earnings have been propped up by the RIN market over the past two years. MUSA's RIN revenue has doubled from 2014-2016 and this effectively drops to the bottom line. MUSA's avg. sale price per RIN has come down from $0.82 in 2016 vs. $0.60 in 1H2017 but i don't think the market has fully appreciated its effect.

 

Smaller avg. square footage per store vs. competitors makes MUSA much more reliant on 1. gasoline sales (~80% of rev) and 2. Tobacco (6% of total, 73% of merchandise). Management has stated that they expect average miles driven to be flat over the next ten years so gas revenues will be reliant on growing volumes (likely through new builds) and gas prices (which have a breaking point where consumers will cut back on driving). The Company is also only 1.5 years into their "independent growth plan" after Walmart ended the agreement where MUSA was able to build stations at WMT locations.

 

Biggest risk i see is a potential takeout, as there has been some consolidation over the past couple years, but with Kroger recently announcing they are exploring the sale of their gas station operations, i see this as unlikely before the thesis can play out.

 

Has anyone else taken a look at MUSA?

[Simple Investor]

I've owned it for years.  RIN prices fluctuate like crazy.  Earlier in the year it looked like RIN's were on the chopping block (Carl Icahn and regulatory changes) but it looks like that's on hold.  There are a ton of questions related to RIN's on the call transcripts around that time.  Hard to understand the impact if they go away.  The company tries to explain it but it doesn't sink in.  Which leads me to believe they are important.  So we both have regulatory risk around RIN/s.

 

Don't forget they own those 1,000 Walmart properties.  And that's prime Real Estate. 

 

It does seem overvalued and I have been trimming.  The stock was just at 62 a few weeks back.  But when gas prices drop their spread goes bananas (in a good way).

 

They claim to be the low cost provider.  Plus they have done huge buybacks and continue to do so.  The CEO strikes me as a good capital allocator. 

[mrholty]

Is there are good source to learn and track RIN and its pricing?

 

I've worked in the past for a major supplier to Murphy and other retail fueling locations.  I would agree that they are cost conscious and they have a decent capital allocation strategy but they are not forward thinkers.  I think if you went to the top 20 marketers half would tell you they are the low cost, the rest are the biggest margin.  What they do is they buy cheap but they don't pay up for quality.  I was not in this industry for a long time but some retailers spoke about buying for total cost of ownership assuming future environmental costs if something goes wrong.  These guys wanted cheapest upfront.

 

They have no niche like a Wawa.

[Leverage Capabilities]

I'd say that the CEO is somewhat unproven on capital allocation when it comes to new store builds (where i see most of their future growth coming from). Under the WMT agreement, they had it pretty easy but their 2015/2016 class of openings have been pretty underwhelming. Seems like they are struggling to find good locations that they don't have to overpay for. They've also said they will likely have to lease ~50% of future locations. Obviously this means less capex upfront, but also additional OH moving forward that is going to eat into margins. 

[Simple Investor]

I guess its all debatable.  At one point store builds were at 5-6% per year.  Once the WMT deal was over they bought back a ton of stock (over 10% in a year).  By the metrics I looked at they ran a lean organization.  But at the end of the day its a gas station biz.  When I compared them to the other Spinoffs they had the best metrics at the time.  Its worked out up to this point. 

 

As far as Wawa I'm not familiar.  Judging by the website it looks like a great place.  I think MUSA new builds are 1,200 sq feet -  Low cost provider seems to be their market.  Wawa looks like a premium place. 

 

Also don't forget the CEO sold the Ethanol plants (and other assets)  And he waited for the right price.  I'm not an expert in this industry but I give him high marks for capital allocation.