Chit Chat Stocks - Murphy USA (Ticker: MUSA) with Fabio from Capital Mindset

Episode Date: September 14, 2023

Murphy USA Inc. (MUSA) is a leading retail fuel and convenience store chain in the United States, offering a wide range of products and services to motorists, including gasoline, snacks, and more, while grappling with competitive pressures in the retail fuel industry. Listen as Brett and Ryan ask questions about the company, its business model, and valuation. Enjoy the show! ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Fabio's work? Find their YouTube here: https://www.youtube.com/@CapitalMindset/featured Contact us: [e-mail] Timestamps Murphy USA | (2:00) Fuel Concentration | (10:02) Industry | (24:51) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive episode where we interview an analyst to discuss a single stock or industry. And today we are talking about Murphy's USA, which is a company I'm guessing most people aren't familiar with, most investors, especially if you don't live in kind of the South or the Southeast where most of the locations are. But we're talking with Fabio from Capital Mindset. They run an investing club. We're going to link to, and they also run a YouTube page. So we're going to link to that in their show notes. I want to mention here, if you're listening right now, Fabio did the courtesy for us of really prepping for the show and putting together a slideshow, which I think will really

help as a bit of a supplement to the episode today. So if you want to try to watch, feel free to do that. You can do it on either Spotify or YouTube. But without further ado, here's our interview with Fabio from Capital Mindset. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode.

All right. Welcome in. Today, we are joined by first-time guest Fabio from Capital Mindset. We recommend checking out the YouTube channel. They have lots of good content on there. But today we're talking about, I would say, a company most people, well, maybe it's because we're from the West Coast, but maybe a less known company called Murphy USA. I'm sure the Southeast and people from Southern states probably know it a little better. But why don't you just, I guess, go through the basics here. First of all, I guess, welcome to the show, but for anyone who hasn't heard of it, what do they do? So it's a pretty boring and simple business. It's a gas station. I think with everything, the first thing we want to always talk about, of course, is the

total addressable market, right? For your listeners who are listening in, this is, of course, a joke. So I introduced a joke to try to keep things lighthearted. And what I'm going to describe to you is the total addressable market for FleetCorp is about 170 trillion. So, you know, larger than that of the global GDP. However, the joke here is, of course, Moosa has a total gross market of 180 trillion, which is about 10 trillion more than Fleet Corp. Therefore, it's a better investment opportunity. Exactly.

Exactly. We don't need any more. All right. Podcast over. It's over. Yeah, exactly. But just so everyone knows, Moosa, that is Murphy USA. That's the ticker.

I guess they will have seen that in the title, but just to be clear. Oh, yes. Murphy's USA, Moosa. Typically, we'll just call it Moosa. But yeah, what is Moosa or Murphy's? Murphy's was a spinoff back in 2013 from the original overall larger enterprise in oil and natural gas. So Murphy's was the gas station component.

And ever since then, they pursued a strategic partnership with Walmart soon after, which ended in 2016. And that allowed them to get a lot of their initial growth. And so for those of you who are familiar with Murphy's, most likely or maybe you actually know them from being in front of your Walmart. And so they have a very symbiotic relationship. We'll get into the target customer and the style by which Murphy's operates. It's very similar to that of what traditionally you would think of with a Walmart. And then the strategic capital allocationship, which we will be discussing in more detail later, that started actually in 2016,

soon after the end of the partnership with Walmart. And as you guys, I know, have the theme going on right now for cannibals, this in and of itself is a cannibal. And I think you guys said this one wins for now, the cannibal prize? I think so. I would have to go back and check.

Maybe AutoZone is better in the last 10 years. AutoZone is better in the last 20, but over the last 10 years, I think I saw Murphy was what, down 55% shares outstanding. So really, really phenomenal. And it's 33% in most recent time. We'll touch on that.

It's been really aggressive recently. Okay. Do you want to walk through kind of the, I guess, the financials? And maybe I should have mentioned this, but if you're listening right now and you're only listening, Fabio is going through a slideshow here. So there is, if you want to check out these slides, you can either watch us on Spotify or YouTube. But I guess for now, can you walk us through, I guess, the financials here? Or do you have anything before that? Real briefly before that, just like on a bird's eye view, what you're looking at from

Murphy's USA, what they have to offer as a business, they are a low cost provider. So they focus on high volumes. I mentioned briefly before how they're almost like a natural partner with something like Walmart. They're never going to be the competitor charging the highest price. They're not going to make the highest margins on fuel, but they're always going to try to find other ways to profit from a different kind of upsell. And we'll get to that in another topic.

One of the weaknesses, though, and I kind of talk about this, I have an asterisk on customers, right? What do I mean by customers? Well, the customer component, if we see like Dollar General right now, they've actually been discussing how their customer is pretty much at their limit, Murphy's actually targets that value-oriented customer. So in times of economic hardship, while they do present that opportunity for that customer who maybe is looking more for a value, at the same time, we have to recognize that that

customer or that average customer base and aggregate is perhaps getting hit in a different way than something like the target customer of something like let's go extreme in costco where the median income of their customers is over a hundred thousand dollars so um the fuel margins is both a benefit but also a potential risk while the fuel margins is how they strategize and how they get their costs so low they focus on having low margins on that fuel they basically get it to as low as price point possible it also gives them less room for error which we'll look at in some of their competitors and of course you do have the opportunities they have within the market which is mainly from the consolidation the majority of the industry still about 60 percent is still

controlled by single uh operators so mom and pop and uh so there is still room for that now the threat which we'll get to in more detail of course is everyone your audience is probably thinking about this electric vehicles and uh the other larger players that they might think about by Like Kushtard and you have some of the private players as well. But you wanted to talk about the financial position, which one of the things we get to right in before we get into the financials is actually some of these metrics that they highlight, which is the main metric they call fuel break-even costs. And I'll refer to it as its acronym FBC.

So it's a simple calculation. You take the merchandise gross profit. you subtract out the operating site costs, and you divide that by the retail gallons. So when Murphy's first started in 2013, they had a FBC of about 3.5 cents. And today it's at zero, and they have a target of always maintaining it at zero. So what this essentially means is that the merchandise in practice is covering the overhead expenses, and that allows them to have basically the rest of the fuel sales as pure profit. We'll get into a comparison of margins at some point versus competitors. And they call this the Murphy's USA virtuous cycle.

So otherwise, self-feeding loop, however you want to call it, which is low fuel costs, more customers, more retail transactions, upsell. And you also have the lower FBC, which then in turn increases profits. his portfolio decision-making. We were early subscribers to the Science of Hitting research service, and we genuinely believe that Alex produces research that is on par with top Wall Street analysts at a fraction of the cost. I mean, the fact that you also get complete portfolio transparency and 100% accountability is just icing on the cake. Effectively, you're outsourcing a full-time equities analyst role for just $349 per year.

Brett and I both pay for the service on our own, and we can tell you that it's honestly worth the money. Some of the companies that Alex covers includes Microsoft, Netflix, Meta, Roku, Costco, Match Group, Berkshire, tons of others. So if you're interested, check out the TSOH Investment Research Service today at thescienceofhitting.com. brand pure Vita shampoo or conditioner for $8 each. At Real Canadian Superstore, when you're ready, we're ready with a whole world and more. So one follow up there is the majority of their profits or maybe all of them. I don't know if you'll probably get into this a little bit later comes from the fuel. Is that what you're saying? Precisely. They focus on the metric that we just

went over. They focus on trying to get it so that the way to think about it, the retail sales cover all of the operating expenses for the actual location. And then yes, subsequently the fuel is go straight to the bottom line. That's their goal. And that's how they try to explain it to investors when they're looking at their business model and trying to break it apart. Fairly simple at the end of the day, like this is not your most exciting business with all its moving parts. We'll get into like how they actually get their fuel so cheap, which I think is kind of interesting, especially when you compare it to competitors. But they are still a major player. They have a lot of negotiating power, but we'll get to that. Sorry, I was going to ask if you want to go

through the financials, but you do have the slide up there for the audio listeners. We got a chart up here of their sales breakdown, which Fabio is about to go through. Of course. So those of you who are listening in, I broke down the sales by percentage and you have the petroleum product, which makes up 80% of the sales. And then you also have tobacco sales, which makes up about 12%. And then non-tobacco sales at 7%. Non-tobacco is becoming more and more significant. Management has been trying to highlight the improvements in that space. And they've actually been making some acquisitions to improve that space. But tobacco sales, that's kind of the cash cow we already know about declining volumes in the industry overall. And so they're very much aware of it.

And actually, recently with the CEO commentary, he's been discussing how they've really been trying to position themselves, believe it or not, in the energy drink space as the go-to spot for a lot of their customers to go get energy drinks. Recently, he had conducted an interview, I forget with which news media outlet, but because it was him doing an interview, of course, I read it and just got his insight there. But he's been talking about how Murphy's has positioned themselves as the go-to place for their customers to have a convenient stop for that energy drink. So overall, you are looking at a business with stable margins across the longer period of time. And you also have the kind of dynamic where fuel costs or fuel prices rising can harm the non-fuel sales.

But vice versa, if you have lower fuel costs, you also see or witness an increase in the non-fuel sales. So while fuel sales or fuel prices increase, you might see a decline there. Fuel prices decrease, you see an increase there, which is their pitch to investors basically saying that in any environment, there's a way we can succeed. You do have a strong balance sheet. in more recent times, that has been less so because of the acquisition, but it's not an issue. As far as what I've broken it down to be, it's a non-issue. We'll talk about the debt breakdown soon. But for the most part, that's my summary overview of just their financial health. They are in a strong position to continue to do mergers and acquisitions. Although

So once we kind of break down the recent big merger, there really isn't that behavior that I really don't like, which I call empire building. If you want an example of that, AT&T, Warner Brothers Discovery, telecom buying a media business, it's completely expanding out. Yeah, we should hope that they don't try that with Musa. That seems to be one of the big concerns for a company like this. But Ryan, you had a follow-up question? Yeah, so I guess we've never really looked that deeply at any of the publicly traded gas stations, but my impression was that they basically sell the gas at cost and make money on the whatever, selling the sodas, the snacks, the tobacco in the stores.

You're saying this is different than the typical gas station? Correct. Correct, yes. Correct, entirely so. um and they well we'll get into the procurement but one of the ways that they get the uh well we'll actually get into that now it's if you look at how murphy's actually acquires their fuel 50 percent uh comes from uh their own um a mix about 40 percent comes from the actual refiners direct from refiners we call it white label and then 10 percent comes from you know just the general

market. So the vast majority of it, they're getting at much far reduced price versus a lot of their competitors who strictly get it more than likely from the market or in many cases from the refiner. So them having that mix of acquisition for the fuel gives them that ability to always be basically fighting for that lower price. And again, keep in mind that the vast majority of their competitors, about 60% of the market is still that mom and pop player. And so in this space, there is that marginal seller effect where you have the local gas station that you're competing with and everyone's kind of, the prices can vary kind of drastically between one gas station to the next. And Murphys, if your listeners have ever been to a Murphys, they're

typically known again for being that uh cheaper option uh and then you might have the gas station you know down the street with a higher price and the only reason why you'd go there is just simply out of sheer convenience but you are aware maybe that there's a murphy's right down the street um anything else anything else on the financials yeah we want to move to quick check um you mentioned that acquisition how has the quick check acquisition gone i know they're moving with that into the Northeast, I believe. And it has the better mix of, I would say not fresh, but maybe just food, you know, restaurant, maybe not casual, but maybe very extreme fast food stuff. So what progress have they made adding that to, you know, they talk about the cross

pollinating of the brands. How has that gone? How has the acquisition gone in general? So the acquisition overall has gone quite well. So that's actually, I'll start there first. And so what they're doing is they've actually been able to increase food and beverage contribution by about 9% in the year of 2022. What I kind of listed out as what I want to look out for, their goal of integrating QuickCheck into their existing stores or some version or variation of that concept because the majority of Murphy stores, they're smaller in size. I would kind of equate QuickCheck to, for your audience that have been to maybe a Wawa or a QuickTrip, QuickCheck is going to be more so akin to that where you can get your sandwich or soup,

hot food and beverage. People actually enjoy going to those places and getting food. Now, why does the management actually call it, as far as their strategy of it, they call it capability building? Well, you kind of alluded to that where they're trying to become more of a place where you can stop and enjoy yourself for a little bit. And that key word, enjoy yourself for a little bit, it plays into the EV trend. So those of you who have an electric vehicle, you know, I myself count myself among that. And when you're out there charging your car, it takes a little bit. It's not as quick as a gas car. So if there is a convenience store there available where potentially I can get a hot food or beverage, that's going to be more enticing for me to actually go in there and then they can upsell me on that product. So Murphy's has identified that as a future need. And so the entire industry, for the most part, is attempting to move in that direction.

This is management telling me as an investor, hey, we're aware of that shift. We're trying to position ourselves early. So QuickCheck hasn't rolled out as rapidly as some people might have thought it would. And that's simply because the current need for it in Murphy's portfolio isn't as extreme as what someone might believe with other players. And we'll get to that when we talk about the demographics, what type of customer they are, where are they located? Because that has a huge play. You don't want to see management just acquire this and then just spread it all over just because. We want to see that everything

has meaning and purpose to their strategy. Management has talked about that presently, there isn't as much of a need for a lot of their customer base because simply electric vehicles aren't as prolific in the areas that they serve. And for the time being, it doesn't appear as though, that's going to be the case for a couple of reasons, mainly range, existing range for current electric vehicles at the price points that the customers they serve. It's just there's not a match right now. Give it 10 years, we have a different story maybe. But for the next 10 years, it doesn't, there's not really anything out there on the market. And I can kind of talk about some of the Chinese products that have come out with the sodium ion batteries that are coming out this

here. If you look at what they have to offer, well, it's a cheaper price point. Yes. But what are they lacking? A lot of range. And in these more remote areas of the country where you might find Murphys, that is probably one of the last customers that will want to purchase a vehicle with a low range, despite it being at a much lower price point. So I guess I wanted to ask kind of about this because it also leads into our electric vehicle question so is the plan here to slowly make a greater and greater percentage of the murphy's store base this quick check style layout and if so is that are they like going through and retrofitting existing stores to like fit in this stuff is that how is that super costly or is it just the new stores

nodes. They are actually retrofitting older stores. They have in their CapEx budget, they talk about just for full disclosure ahead of time, the CapEx is actually projected to increase close to 400 million for the year of 2023. This is all part of that reinvestment into the existing stores, updating new stores. So yes, it is going to be not an uncostly endeavor. It's going to be somewhat of a costly endeavor. It's going to temporarily, but not to a big degree, because we'll get into the cash flow projections, hamper down free cash flow. But it's a necessary investment.

I agree with management. But I also appreciate the pace of what you're doing, which makes sense with the overall broader understanding of the business, where it is positioned. There's no massive rush. One more follow up on that. Are they adding charging stations to these places? Have they talked about that at all? I'm sure an analyst has probably asked about that before.

Yes. And yes, they have. It has been asked and they have been, again, also at a moderate pace. So they're looking at location by location every time that the CEO has been asked about it or management as a whole has been asked about it. They're viewing it on, they're looking at their portfolio and on a location by location basis, they're adding electric stations where it's needed. But for the most part, in a lot of their across their portfolio, there really isn't that much of a need presently has everything to do with where the areas that they are serving quick check when they acquired it came with a lot of locations that already had that capability.

And for some of the places that quick check was servicing, it made sense. But a lot of the places where legacy Murphys you'd find it doesn't make as much sense currently. All right. And anything else on QuickCheck or I guess we kind of combine this with the electric vehicle. So anything else on the electric vehicle threat? I know a lot of people when looking at a gas station stock are going to think about that as the giant thing looming over their head. So before we move on, anything else with EVs? Yeah. So with EVs, as far as the, I can talk about real quick, the management's commentary on it. So their overall mission is always to geared towards that lower cost consumer, I'm going to highlight yet again, the current

barriers for electric vehicles is mainly centered around the range capabilities, the type of customer that, again, they have, which is more of a value seeker and the price points that we see EVs at, and the cheaper EVs that do exist, they, again, going back to that range capability where they don't yet have the uh uh option to kind of not um forego that extra range so they can get a ev vehicle at you know the 30 and below price point very few but when you see what those options uh are or exist on the market they don't offer that range capacity and so that's not really an option for the areas they serve it's not uh something that the average customer that they target is going to make that sacrifice. Now, I put some highlights and I'll highlight,

again, this is coming from the investor presentation. I'll say it out loud for your audio listeners. So the less densely populated Musa states and lower income customer base lead to lower penetration and even lower adoption rates. So again, this is kind of reiterating those points mentioned before. And then Musa is investing in affordability for value-seeking customers. So just again, reiterating that point over and over and over again. So when you're looking at this company as a potential investment, you really need to understand who their target audience is, who's their target customer, because maybe you don't fit in that. However, you need to just at least kind of grapple with the idea of what that customer is. And there are benefits

and drawbacks to it. So I like their current rate of retrofitting their stations. I think that they're aware of who their customer is. And that's something when I see a company that doesn't understand who their customer is, that's a, I consider that a huge red flag. So overall, I'm happy with that. Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad. I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. All right, now let's move on to the overall industry. I think people, well, you know that there's gas stations all over the place, right? And you know, there's these quick service convenience stores. But I think the actual size of how many there are across just the United States is quite staggering. So can you talk about how large this market is? I think another thing that is surprising

is how unconsolidated it is. There's only a few large players and a lot of mom and pops out there. Yeah. So the overall industry, like you just said, is extremely fragmented. You have single stores, operators own about 60% of US gas stations, which people sometimes don't. They're very surprised to know. But yes, that is actually the case. And so this goes for not only Murphy, but also their competitors, there's still a lot of room for consolidation acquisitions all across the board. It also means that your average competitor, the majority of your competitors don't have the scale that you might have. Now, one thing, kind of taking a step back on the overall industry in the past couple years, they have all of them as a whole, the whole

industry has experienced increasing fuel margins. So we talked about that more or less as part of risk while the margin is a strength moosa it's also sort of a weakness that we want to be paying attention to we have to come to the table understanding that more recent fuel margins may not be realistic or up to expectations of what we should expect in the future and so when we're doing our evaluation we want to be you know at least understanding of that now the fuel margins as you can see i'll describe what we have uh on the visual we see that the the average has been 24.9 cents per gallon. And right now in 2021, or the measure in 2021 was 30.9 to illustrate it that is much higher than the 2019 rate of 24.8. Again, that's the industry

average. And we can see that in 2020, the average was 35.2, we do see a downtrend. And I can assure you that more or less, it has come down slightly, but not back down to the teen levels. Now margins, overall, they have been on the rise. But if you look at competitors, they all compete a little bit differently. So the main one that people might be thinking about is Alimentation Couchetard. And I promise I didn't say a bad word. That is the name. And they are from Canada and specifically Quebec. They are the strongest and largest player by market cap, revenue, whatever way you want to look at it. I will be talking about them a little bit more in just a second. You also have some of the private players like buckies i don't know if you guys are fans of buckies and yes we don't have

them i don't think we have them in the i don't think i've never been to a buckies i don't even know what it looks like i think that's my west coast coming in but are they what is it like what what is the concept uh it is perhaps okay so think of mega store concept but it's a gas station um and first of all you you know those companies that have like cult-like followings yes exactly yeah bucky's is that when bucky's goes publicly traded i guarantee you it's gonna have a crazy premium in this space um the amount of times i go anywhere and this is in states sometimes that don't have a bucky's in them i will see people wearing the merchandise of a gas station let me remind you it's a gas station yeah that is a bit strange we don't we don't have that what do we

have i don't really we don't really rep rep our uh chevron stations quite like the i don't know if we have anything that's like just regionally popular yeah we just have the mega chains out here but shell chevron i'm trying to go the other one big ones yeah costco anyway one of things they're famous for too is is the the management or manager pay uh you'd think you know but bucky's or gas station manager doesn't make that much well at bucky's they make boards of 200 000 a year um they're famous for that um they they do treat their employees really well um and famous for being high pay and if you see the amount of visitors if you go to a bucky's it's it's something to behold um you have also other competitors like wawa and quick trip which

are similar concepts on the food and beverage side what they're trying to emulate in the future and of course the mom and pop locals that's uh some not all the competitors but a lot of the competitors of course alimentation kushtard is going to have um a bunch of brands that you're very familiar with circle k example of course one other one that you could think of is 7-eleven gas stations um now what is their positioning which i think is very important to understand you know the competitors, but where does Musa fit in all this? Well, Musa is the low cost provider. Again, their strategy is going to be getting you the lowest cost fuel as possible. So you can come to theirs and they're your choice of fuel and they can upsell you on other things.

So you have roughly 40% third-party fuel and that's indexed at spot rate. Half of the fuel, again, is blended by Murphy itself. And they also achieve very favorable rates across the pipeline. So that's another way that they're able to bring down costs. Now, CouchTard being the largest player, I wanted to address them first and kind of highlight how different they are versus something like Murphy's. And your audience might end up liking CouchTard's strategy more than Murphy's. It's two totally completely ways of playing the same space. So they are a global player. You'll find CouchTard's brands, not just in the United States. If you're looking for a global play on gas stations, convenience stores, quick service restaurants, hey, here you go.

They have food restaurants, cafes in Europe. They have, again, your classic gas stations here in the United States. And they've been playing a lot with different themes or different concepts as well. Their strategy is simple. It's pretty much acquisition-based. Acquire new brands and realize some synergies. And that's how they've been growing for the past decade or so. They do not compete with Musa on pricing. They don't even try. Their fuel margins are going to be typically higher, and they are not going to be even caring about being the low-cost provider. They're focused more so on having as many locations as possible, as conveniently located to as possible.

So again, completely different strategy between there. Okay. You already kind of touched on them being the low-cost provider, but are there any other competitive advantages that you think are worth noting? Aside from the way they acquire the field, no. There's nothing that drastic because they have the scale that's addressable towards They're smaller players, and that still kind of all circles into being the low-cost provider. Going back to that Murphy's circular feedback loop benefit that they have.

Well, then let's talk valuation because I think this is probably one of the things that I guess the buyback plays into the valuation here. But what are your thoughts on the valuation at the current price? I know you mentioned it. Stock went up the day that we're recording this. The stock has gone up, but I don't think it's that big of a deal. And then I guess, what kind of returns are you expecting going forward? You mentioned that the buyback is actually accelerating, which tells me that it's traded, I'm guessing, at a cheaper valuation than it has historically. I guess, just what are your overall thoughts? My overall thoughts is it's still somewhat compelling i for full disclosure this is my in my top five holdings so i want to say that because

i don't want to i want everyone to know my biases here so this is a top five holding um of mine and i've held it for quite some time now i took advantage of some of the weaknesses this company experienced in 2022. now looking at the current opportunity i i do have um something to kind of illustrate that. And talking about the buyback, first, they have a capital allocation strategy of the 50-50 approach. And that's how management calls it, 50-50 approach. What does that mean? Well, they want to do 50% CapEx and 50% capital return to shareholders. Fairly simple. That is broken down by about 45, give or take, percentage points in buybacks and about five, give or take, percentage points in dividends. It was a very small dividend. They're growing it

quite slowly uh relative to how they're growing you know for example their overall buyback strategy so the management has been very clear that they much would rather right now do buybacks rather than paying a dividend and if you're interested in that well then you know you're probably aligned with management on that thought there um so the uh the capex strategy that we discussed earlier is referring to uh that that allocation strategy they are uh contributing part of that capex to renovating the new stores as well as build out new stores but very few new stores i just want to kind of illustrate that i think it was uh just uh out of their 1 700 and some odd stores they added just a you know single digits a number of stores low single digits so it's not really too much of

of that. And you can see here for the visualization, again, I'll describe it here. We do have the cashflow from operations growing much more rapidly than the repurchase and CapEx together. So this is trying to illustrate that the buybacks are supported by increased cash flows from operations. So free cashflow as a whole, it's not that they're going out and borrowing tons of money to do financial engineering. We all, I don't think anyone really likes that. We all know the dangers of conducting that strategy. And you've alluded to very early on in the episode, the amount of shares outstanding has declined by a whopping 53% since 2013 and 33% since 2019. That's what I wanted to talk about the acceleration. A lot of that has been in more recent time. They had

recently completed about a $1 billion buyback. But then this year in March, they approved, it was March or May, they approved a $1.5 billion buyback. It was March, actually. So that's going on until 2028. But management, when asked by analysts, if you're curious, are they going above that 50-50? No, they're going to keep it at about that 50-50. So in line with that range. I love management teams when they're open and transparent to the shareholder. Everyone does, but I like it when they're telling us right from the get-go exactly how much they're going to be contributing towards buybacks. And then they actually do it because we've heard time and time again, companies say stuff and then they actually go back on it or come up

with excuses every quarter for why they didn't do it. And so I'm, okay, I'm just looking at the market cap right now, it says $6.9 billion. And using that last chart you showed, I think they did just under a billion dollars in operating cash flow with $800 million in buybacks. Is there a lot of... You briefly mentioned the balance sheet earlier. Is there a lot of debt on this? Do you think that can really be sustained, that level of buybacks? So the amount of buybacks that they're doing right now in recent times, and we're talking about 2022, has been fueled decently by debt, but going forward, not so much. So much of the debt that they did take on was for the acquisition.

They took on a little bit more debt for, again, about $200 million to pay closing fees, etc. And the remainder, it was about $600 and some odd million dollars, nearly $700 million for the actual acquisition. But going forward, management's commentary has been reframing from using debt to fuel buybacks more so from operations. So that's why they have about $1.5 billion approved from here to the end of 2028. And so based on that, that goes into the valuation when we modeled it out, kind of seeing how much is that going to be on an annualized basis, that return of capital.

But that's a good question because that's something, again, that should be a concern to everyone. Are we going to do financial engineering, just borrow tons of money, especially considering what rates they'd be borrowing it at right now? There's only about $400 million of what they borrowed that is coming due in 2028 is on the LIBOR plus 1.75%. The remainder is, well, there's a credit facility and the remainder of that, which is about it's 300-ish million, 300 or 500 million. I have it written down on the slides, is fixed. And that

one is maturing in 2031. So no near-term debt maturities to take note of. But yes, you want to be paying attention. If you're interested in this investment, that management isn't borrowing tons of money, putting it onto the balance sheet, and then using that to buy back shares. So something to definitely keep an eye out for. All right. Anything else? I know you have a third slide here. It looks like for capital allocation, valuation, stuff like that. What do you have for us? Correct. So this is something that I've found interesting. I wanted to share with your audience and I'll describe it. In 2027, they actually give us a target. So it's something that we can actually pencil out. What they're looking for in 2027 is to reduce share count from 21.7 million

in 2023 to 17.7. So we have a goal. And so from here, we can kind of start to pencil out how can we grade management? Because I like it when management also gives us these straightforward goals. And then we can, as investors, give them a grade. How are they doing? And follow along that goal and hold them accountable. Also reassess her investment if they're not complying by it. Because like you just said, management teams have a tendency to promise things and then just not follow through with it. We do have a cost per gallon of about 30 projected out in 2027. A multiple estimate on the valuation of stock of 10, that's more or less in line with what they've been in the past. And so they're just taking the average there. But the share count is really what

you want to be looking at there. That's a pretty aggressive buyback strategy, again, going into the theme of what we've been discussing earlier. And you can see that that assumes a $1 million shares repurchased annually. So again, something to kind of judge them for and say, hey, how are you guys doing? Are you guys complying with that promise? Are you guys faltering through with that? So I do like that that was included. But that kind of gets into our evaluation. All that comes together. So I, myself, and one of the other analysts of the club, we did our own valuations. I'm actually showing you his right now. But I'll walk you through basically discussing my own. I didn't re-rate or re-put my own because for the most part, we came to very similar

conclusions. But I'll walk you through any differences that may be there. But what essentially you're looking at is a company with an enterprise value of 8.2 billion. And you do have revenue of about 21 billion with an EBITDA of about $1.01 billion. The multiple that you see on average longer term. Again, you can kind of expect with what management has guided for about nine to 10. Price to book, we use that as one of the measures for valuation. So we did a DCF price to book, exit multiple approach, even the multiple approach and a P multiple approach. And then the analysts blended it all together into a fair value calculation of about $348 per share. That comes out, by the way, that's not the price point at which we're interested in acquiring more.

So my actual price point of acquisition, if we want to call it that, is about $273 per share. The analyst in question that we're looking at, it all came about to $270 per share. So we kind of came in line. We're both, his was pretty conservative in some areas. Mine was more conservative in other areas. I assumed, lower contribution to buyback than he did. But an estimate return rate right now of high single digits is what we're looking at right now with the current updated price. So that 8% is as of today. Right. And for reference to any listeners, as we're recording, share price is

about $322. Correct. Correct. And so today there was a decent rally in the share price. For some reason, the timing was unfortunate, but because I don't like it when the stock price goes up right now, because that also means the buyback strategy, each time it keeps going up is going to be less and less effective. But that's right. That's right. It is a very counterintuitive for shareholders, for a company with a heavy buyback like this. Now, as we close things out, unless you have anything else to add that's important here, we want to always close out these interviews with the risks. So what could go wrong here? Why do you think an investor would lose money owning Moosa over the next five, seven years? The risk actually comes back a little bit into

the valuation as well, because one of the assumptions, we normalize the margins out to about 2.5%. So that's also a very important fact to be had. Because right now, the margins, if you kind of map them out from here on to the end of time, you're going to be on the higher end. So when we normalize the margins, we decided to do about 2.5%. If there is a deterioration of margins beyond that, that is one risk. And so I do have a couple other risks to really talk about. So that was, we talked about empire building, right? Well, one of the things that might also be a concern is a complete switch in strategy,

something that worked. If it ain't broke, don't fix it. something that has worked for you in the past decade, and then you simply switch over to this new model that's not as much proven, maybe you're not as strong of a player in it. And that could cause the core business, the core strategy to deteriorate. So that's one risk that I've identified, and I'm going to be paying attention to this is not a company that I'm just setting it and forgetting it forever. I want to keep tabs with it, make sure that management is doing the proper steps in adapting to the changing world. And those changes are not destroying the business.

So very key point, because going back to that previous risk that we focused a lot on that change that is coming is of course, electric vehicles. How are you adapting to that? Right? Very important. And that's its own point on its own. I also look at tobacco sales, believe it or not right now, because it is a significant portion of their business. It's not something we can ignore. How is that faring? If we do see a rapid decline in tobacco consumption, that could actually impact the valuation. So it's something we can't actually ignore. But the main risk, I would say, has everything to do with the overall margin story. And that's if you actually, if your audience sees and was wondering, why is the short interest so high? Well, that's actually

a large part of the Bayer thesis. The Bayer thesis currently is that Musa or the industry as a whole the margins are elevated and they're going to come down perhaps maybe around 2019, 2018 levels at some point. And that is very much a possibility. So your counterpoint to that is, well, the margins will come down, but not as much as what the bears are saying. And more in line with what that trend line we saw earlier, where the margins in this industry have been trending upwards as they've been pushing a lot of the costs onto consumers. And the industry, again, has been consolidating and they've been realizing efficiency. So multiple ways that they've actually been able to achieve that.

And if you look at a player like Musa, not isolated to Musa, but the larger player, Musa being among them, they have a strategy that enables them to acquire fuel at really low costs and again, allows them to be that low cost provider, which more or less shields them. If you're the lowest cost provider in your market, you are more resistant to downward pressure on price than your competitors are because they typically have higher prices on their fuel because they can't afford to take on that lower margin. So yeah, that's the main risk that I see. Okay. I think that answers pretty much all our questions. If listeners want to keep up with you, find more of your work, what are the best places to do that?

The best place to do that is my YouTube channel. And I also have the investing club capital mindset, which is usually in the link of the, on the YouTube channel. And we do pitches from myself and the other analysts. Okay. The YouTube channel is called capital mindset as well, or is there another one? No, Capital Mindset. Okay. Okay. And we'll include that link in our show notes

if you want to check it out. But before we leave here, we should throw a disclosure on this. Brett and I are not financial advisors. I'm not, Fabio, I don't know if you are. I'm not a financial advisor, no. Okay. Anything we say or discuss here on Chit Chat Money

is not formal advice or a recommendation. Brett and I are general partners at Arch Capital. So clients may have positions in the securities discussed in this podcast. thank you all for listening thank you fabio for coming on the show and we'll see you all next time