Motley Fool Money - Stocks for the Road

Episode Date: September 15, 2024

If you’re looking for a stock that’s been a multi-bagger over the past five years, then check the gas station next to a Walmart.  Mary Long caught up with Motley Fool Canada’s Jim Gillies for a look at three companies you can find on your next road trip. They discuss: - An industry where investors can ignore sales growth. - What shifting consumer tastes mean for convenience stores. - One company “taking over a mountain no one else wants”. Companies mentioned: TSE: ATD, OTCMKTS: SVNDY, CASY, TKO, WMT, MUSA Host: Mary Long Guest: Jim Gillies Producer: Ricky Mulvey Engineer: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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But investing, we talk about the cash loan, how much cash a company. A business is valued on the cash it can make from now until the end of time, discount it back to the present at an appropriate discount rate. That's kind of stock valuation 101. But I think that misses a key point of the game of investing. And that is, well, what if management are morons? I'm Ricky Mulvey and that's Motley Full Canada's Jim Gillies. My colleague Mary Long caught up with him for a quick road trip.

They've got to look at three gas station stocks, including one going for a big acquisition, one selling frozen pizzas, and a market smasher that Jim personally owns. Our first pit stop is at Alimentatian Couchard, Jim. You want to rank my French before we keep going? That's a solid nine out of ten, Mary. That's a real done. I will take nine out of ten when I can get it, honestly. Americans and Canadians both will probably recognize the Circle K brand, which Cochthard owns.

But this is a convenience store company with a pretty global. They've built that global presence largely through acquisitions. To say that they have a good track record with those acquisitions is probably a bit of an understatement. Since 2004, they've integrated more than 65 deals into the store network, now have nearly 17,000 stores worldwide. That includes licensees. Jim, successful acquisitions can be hard, but Kuchart seems to have figured out how to do

them well. What is the secret? Well, Mary, the secret is blocking and tackling. I actually don't even know what that means. I hear it a lot of conference calls when people talk. talk about, what are you going to do to be successful? Oh, we're going to block and tackle. And I sound very smart.

I presume it's a football reference, but I'm a hockey fan, so I don't really know. No, look, I think you've already said the answer. And the answer is they have a system and they honed the system when they were a lot smaller. They've really been, I think that's from the year 2000 is really when they really started ramping this up. It might have been even a couple years earlier. But, you know, they started small. They were smaller, of course.

And so, you know, they kind of honed a process, if you will. And they have a system and they also have a growth imperative. Even at, I think they're about $70 billion, $72 billion market cap, Canadian dollars, not greenbacks. But they are continuing because, you know, I guess they think they are still more worlds to conquer. They have been getting a little, they've had a little bit of a pushback and they've been a little bit of, they've got a couple failed acquisitions recently. They lost out on, I don't remember the name Speedway or something. They lost out to the parent company of 711 on that one, I think in 2020. I think that's 7 in I Holdings.

They also made a play for a French grocery store chain, which is a bit far afield from their standard things. The company's called Cairfour. They lost them, I think, in 2021 or 2022. Caterfore wasn't interesting. Although the Team Canada fools, we were kind of joking as the management here just really wanted a trip to Paris and said, Oh, well, we'll call it due diligence and then, you know. But no, I think I think they are, I think they are kind of one of those classic growth through acquisitions who they have a process, and that is what they're going to follow, even as they get larger and larger.

You briefly mentioned Seven and I Holdings, and Kushtar kind of came into the news recently because they made, we're going to switch between American and Canadian dollars, I guess, because I've got my American dollars. But Kuchard made a $42 billion offer for the 711 parent company, Seven and I holdings. That was earlier this summer. It sounds like yesterday, today, we're recording this September 6th, 7 came back asking for more. So that's certainly not a done deal. But we're talking about acquisitions. What do you make of the potential deal between Couchard and Seven and I holdings?

I think it would be great. And I think it's unlikely to happen or if it does happen, it is going to be a very difficult multi-year slog. You are correct. It is about 12 hours ago. He says 12 hours when you'd be listening to this a week or so from. Now, yesterday on the 5th of September, late on the 5th of September, the Japanese parent of 7-11, that would be 7-I-holdings, officially said it was not interested, not in the best interest of 7-9

and other stakeholders. And the quote is, we are open to engaging in sincere discussions, should you put forth a proposal that fully recognizes our standalone intrinsic value and addresses our concerns regarding the closing in the current regulatory environment? Translation, It's going to be really, really hard to buy in Japan, which is notoriously kind of standoffish to foreign acquisitions, although they have loosened their regulations there within the last year or so. And as well, your offer is too low. We need more. And I think, you know, it probably would face some regulatory issues in North America when, you know, a street corner with a Circle K on one corner and then Kitty Corner to that is a 7-Eleven.

And, you know, they're both owned by the same company. I think U.S. regulators will probably, you know, raise the proverbial Spokian eyebrow a little bit. But I think it's a bold deal. And I haven't verified this. I haven't verified this. But if this deal does successfully go through, it would make Kustard the fourth largest retailer in the world after names like Costco, Walmart, and Amazon. I don't know if you've heard of them. This is a gas station. So fuel revenues still make up the bulk of revenues for the company. but we have seen total sales in that segment slip between 2023, 2024. There's a lot to love about Couchard.

It's performed quite well in recent years, but a knock against it might be maybe that its sales growth recently has been kind of slow, kind of uneven. Why do we see that slowness, that unevenness? Is that just volatile fuel prices being volatile and the price to pay for being in the space? Yeah. Give me $140 barrel oil again and you're going to see sales growth like, you know, you'll be fine with the sales growth. We'll put it that way. I ignore sales when it comes to these types of things that's reliant on gas. Simply because of what you said. It's so volatile. I think it's better

to focus on profitability metrics up and down the income statement. Yes, you can even go with EBITDA if you want operating profit, returns on equity. You want to focus on margins, like gross margins, for example. You want to see profitability is steady. And as they grow and grow and grow and grow, they still are able to maintain their margins. So gross margins, aside from like one year during COVID where they somewhat made bank for some inexplicable reason, probably because people were only comfortable going to those stores rather than other places. Gross margins here typically run 17, 18 percent. Operating margins run 5 to 6 percent. Nice, boring, consistent. Ignore, ignore the sales number because as you say, it will bounce around a lot, that you have no control over

too. And when it comes to margins, they see much higher margins on inside sales. So stuff like food, lottery tickets, et cetera, that are sold in store. Something that I caught is that nicotine products account for almost 40% of kushhtards, merchandise sales, again, those inside store sales. So how might shifting consumer taste, like a turn away from cigarettes or even just thinking about the gas piece, a push towards EVs impact kush tards or just let kushtard or just any gas station player in the space? Well, I'm actually shocked in North America when I see anyone who's smoking anymore.

Like, you know, and I mean, I'm old enough to remember. when there was a smoking area at my high school. People don't, you try and tell my kids, you know, like, you'd go to a bar and there'd just be a haze of blue smoke about three feet above everyone's head and that was normal, right? Yeah, you know, you're like shaking your head going, no, I don't remember that. You're old, Gillies. But no, like, it's, you know, you still have, so a lot of the damage to the cigarette case is already done, I think, you know, and was done several decades ago. And so we're kind of in a character. taking mode and they've proceeded to go ahead just fine. You've also got things like vaping,

like nicotine pouches, the different ways to deliver you your nicotine cravings. I don't personally have nicotine cravings, but some people do. And there's little things too. You're not going to have known about this because you're in Colorado and I'm in Ontario. But this very week, Mary, this very week, the Ontario government now allows the sale of beer, wine, and alcohol in corner stores and convenience stores. This has literally happened this week. Typically, don't you have to go to the LCBO? Oh, well, look at you.

Look at you. I know, LCD, beer store. But a few years ago, they started allowing grocery stores to do it. And they finally are allowing it in the corner stores like Circle K. So I could just as easily say, well, why will that not drive sales at, at like a Circle K and other Kustard outlets, rather than worrying about the nicotine purveyors to pull off. The other thing, and I think you're probably going to see as we,

I mean, we are seeing a pullback in electric vehicles or at least the, a lot, a lot of people are like kind of more turned to plug-in hybrids, electrical vehicle sales. Once you get rid of a certain company, you know, which we won't name. But, you know, a lot of the vehicles from the legacy automakers, you know, If you want yourself a Ford Mocky, trust me, you can find inventory. There's a lot of inventory out there, and you'll get a good deal because they're just not moving. But I think you're going to probably see more and more EV charging stations at places like Circle K.

And I wish we were, this was a visual medium today because I would show you a picture I snapped last year. I drive my daughter to school every morning. And there's a Circle K down the street from her high school. And I snapped the picture in the morning because not only does a Circle K, have your gas station and the Circle K banner out front. But there is both a Tim Horton's kiosk in there. So you can get your coffee fix and a fire and flour store within a store, which is a cannabis store within Circle K. Okay. And I thought that is the most Canadian picture I've ever seen. You get your Timbies, you get your cannabis, you get your gas. But like, they've got this

network where they will sell and they'll try different things and they'll bring in, you you know, the Timmy's kiosk where they think it works. I would ask anyone going to the fire and flower, please consume whatever you buy when you get home, not in your car while you're driving. So close to a high school. Thank you. But like, there are levers that these guys can pull to keep their business going. And I think they're pretty good at it. You're a value investor. Kuchart is trading at the lowest PE ratio of all the stocks that we're going to talk about today, less than 20 times earnings at the moment. What's not to like? No argument from me.

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Next up, we'll head over to Casey's, which is a Midwestern U.S. chain. It operates both convenience stores and gas stations, but it leans way more into the convenience store piece. They are really big on pizza, especially, allegedly, have it tried it myself, breakfast pizza. They're also really big on being in underserved areas. 72% of Casey's stores were opened in places with less than 20,000 people. Jim, that kind of strikes me as an interesting business plan. Go where no one is. I love that.

I call that taking over a mountain no one else knew they wanted. And the example I always use when I bring up that kind of term is pro wrestling, right? All of life can be understood through pro wrestling. Ricky will agree with you on that. I was going to say, you can hear the eyes rolling. But I'm serious, right? But like Vince McMahon, like everyone just kind of would turn their nose up at pro wrestling for years and years and years and years. And Vince McMahon and the WWF, or now WWE, now part of TKO Holdings, basically went through, went national and then went international, took over all of the old territories where there used to be there would be like, you know, there'd be a Texas Wrestling Federation and a Carolinas and a Florida and up in Calgary, Alberta.

and basically the WW just went through and took over everything. And all along the way, everyone's like, well, yeah, but it's fake fighting. It's pro wrestling. It's not serious. And you wake up one morning and it's this worldwide phenomenon dominated by one company. Yeah, there's a couple of smaller entities. And now it's merged with the UFC, right? And everyone just kind of hand waved it away all the way along.

As Vince McMahon built his empire, he's now largely out, but that's another thing. And that's kind of, you know, to bring it back to Casey's, what a fantastic idea. Underserved areas, right? We're going to go in. We're going to be the incumbent. Yeah, Circle Cake might come in later. 7-Eleven might come in later. But we've already been here for a decade or a decade and a half.

People in the community know we're here might just continue to go. Inertia is a powerful thing. Habits are a powerful thing. You can probably keep the breakfast pizza, though. I'm not terribly interested about that. Yeah, the comparison that you make is apt because the business plan certainly seems to be working for Casey's. It's more than doubled the performance of the S&P over the past 10 years. What is it doing? You might pass on the breakfast pizza, but it seems that they're doing more than maybe just making

really awesome beloved pizza. Well, I am reminded. I think it was Babe Ruth. A reporter once says to Babe Ruth, hey, babe, you got paid more than the president last year and Babe Ruth shoots back. Yeah, but I had a better year than him. I think that's the Casey story. I've not looked terribly close at this company. I've glanced at it from time to time. But look, if you take a look at it, the profitability, growth has outpaced the market. They have a five-year operating profit growth of almost 17%. They started from a low valuation a decade ago. They get good and steady returns on capital. Those things together add up to a market-beating investment. And as you say, it's roughly doubled what the S&P has over the past decade. The gross margin on food sales at Casey's. This is going to be

a common theme with any of these companies that we're talking about today is close to 60% while margin on fuel is closer to 10. The thinking goes that fuel is what gets people in the door at a lot of these places, but around 70% of Casey's inside transactions don't even include fuel. So at that rate, like, why even bother with gas at all? Because you don't want to lose the other 30%. I mean, really, that's it, right? And what's the relative value of said transactions? So you, you know, like, you might get a lower margin, but, you know, I get a higher margin on the $10 of chocolate bar and soda, I'm buying, but the $75 in gas, I just put in my car. Right?

I might go like 10%, but the margin, the dollar value is not going to be a profitability, is not going to be that dissimilar. And then, of course, you also do have, you know, some people are buying fuel and buying, you know, buying the junk as well. And so they go into store. Yeah, so I think it's probably, it's like, well, we have to offer it. Look, when we're all driving flying electric cars, you know, they'll probably stop offering gas. But until then, I think it's probably pretty safe.

They're trading at around 28 times earnings. Does that make you like them even more, less? Well, I am more interested in cash flow multiples and cash flow metrics than I am in accounting earnings. But, you know, I think the 28 times earnings is probably best viewed when you view it towards like a range. You could use EV to Ibaida or EV. I hate EV to sales, but that's another story. But you can use whatever metric you do, you want to do like a time series and see where we

are vis-a-vis, say, the last decade. And when you look at Casey's, most of those valuation metrics, or their pricing metrics really, but most of those are today kind of towards the high end of their historical range. I tend to be of the opinion that most of the time, gravity is a thing and long-term average will win out. So I'd probably look at Casey's as, this is probably a dollar cost averaging. If I want to build a position, I'm probably looking to buy in thirds or even fifths. I'm probably taking my time, dollar cost averaging every three or six months, maybe taking a look,

maybe adding a bit more cash here and there. This is not one I would run into, you know, and make a 10% position on day one. Both of the companies that we've talked about thus far have pretty impressive track records, both handily outperforming the S&P over the past 10 years. This next one, though, blows them all out of the water. And you brought this to my attention when we were talking about this. It's up over 820% in the past 10 years, over 1,200% since its 2013 IPO. It is, do-d-d-do-d-do, drum-roll, please, Murphy USA, a gas station chain with a whole lot of stores located right next to Walmarts.

So those are pretty impressive returns. Probably important to know that the company buys back its stock very aggressively, basically halved the total number of shares outstanding since it's spun off from Murphy Oil in 2014. They implemented a dividend in 2020. They've made a point to increase at each year, if not most quarters. What notes have you got for management on their capital allocation strategy, Jim? Oh, I have no notes. Of the three we're talking about today, this is the one I own, actually. I own this one individually.

I own Custard via index funds in Canada. I'm sure Casey is in somewhere in an index fund that I own as well. But no, I own Murphy directly because of what you've described. Their capital allocation is, I think, second to none in their space. They make a lot of cash. Investing, it is shocking to me how many times we will see this kind of fall through. But investing, we talk about the cash flow, how much cash a company. A business is valued on the cash it can make from now until the end of time,

discounted back to the present at an appropriate discount rate. That's kind of stock valuation 101. But I think that misses a key point of the game of investing. And that is, well, what if management are morons? What if management spends it all on gold toilets, giant monuments of excess to themselves and hoses out equity cookies like it's no tomorrow? And so it has to buy back their own stock to offset dilution, right? Those are things that the company might make a lot of cash.

but if management, it just completely wastes it all, the value of that company is significantly less than it otherwise would be. With Murphy, however, I think their capital allocation is fantastic. And again, it's why I own it personally and it have for a while. I love the fact that they have been so aggressive at retiring their shares. They've also generally been, they generally kind of throttle it with valuation a little bit, so they might take down a little bit of leverage. when the valuation ratios are higher. They might take a bit more down the stock when they're a bit lower. It's going to shock people who usually think I'm so negative, but which I'm not.

I'm actually optimistic. I just like to think I'm fairly realist. These guys get 10 at a 10 from me. Anything that's a yellow flag or that you've got an eye on that could give you like a more bearish angle on the company or something you're worried about? I'm not really worried about too much here. The valuation's a little. I mean, the pricing ratios are a little pricey. I think last I looked, about 25 times earnings, which is fine. It's not great. I think the story started to get out a little bit.

They did up their leverage a little bit. They got about $1.7 billion in debt, which kind of came with the acquisition in 2021 of I think that was Quickstop when they bought that. But no, this is just a Well-run, how do I put this delicately? This is a well-run- Don't be delicate. Yeah, that's true. When have I ever been delicate? This is a really, really well-run company that has outstanding capital allocation using the cash it generates in the service of shareholders via multiple means, buybacks, dividends, intelligent, well-timed acquisitions, and investing for growth, maybe a bit of de-leveraging, trading at a,

reasonable, but not compelling price. One of the interesting things about Murphy's is it has a massive focus on affordability. They highlight in earnings presentations that like 63% of their customers are living paycheck to paycheck. And that's up from the year prior. They want to serve that group of people. Does that apply a different kind of pricing pressure to Murphy that maybe other players in this space don't have to worry about as much? I'm not sure I would agree with that. I think the pricing pressure part.

I think what I would somewhat sarcastically suggest that given what inflation has done and economic conditions of the past couple of years have done, maybe this is just a function of more people are living paycheck to paycheck. That's a little cynical. Again, this is kind of the variant of what I talked about with Casey's where, you know, how I look at, you know, they focus on smaller and underserved communities under 20,000 people. They're going after a mountain. No one else knows what they want.

And when you are in a competitive industry, which this is a competitive industry, right? No one says, I don't think anything. Like, I have yet to meet the person that says, look, I'm a Circle K man. I will not walk into, I will not walk into a Murphy. I will not walk into a Casey. I will not walk into 7-Eleven. You know, I think you have to have a niche. I think you have to have a differentiator.

And so we know what Casey's is. And I think we kind of know what Murphy's is here. And also it doesn't help if you're a gas station if you are offering the lowest price. That's often what gets me in the door at a gas station. regardless of where I am. Yep. That, you know, one tenth of a cent lower, I'm going to cross three aisles of oncoming traffic just so I can get it.

Yep. Jim, thanks so much for hanging out today and talking about these often untalked about companies with me. I appreciate the time. My favorite kind. It was a pleasure going on this road trip with you. Thank you. As always, people on the program may have interests in the stocks they talk about,

and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based silly on what. you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.