Murphy USA: This Stock Could Be Like Buying Couche-Tard in 2004

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Alimentation Couche-Tard (TSX:ATD) needs no introduction.

It has been one of Canada’s most successful stocks since debuting on Montreal Stock Exchange in the 1980s. Led by founder Alain Bouchard, the company grew into a monster by acquiring convenience stores. It made big acquisitions to expand in Quebec in the 1980s before moving across Canada in the 1990s. It expanded into the United States in the 2000s, most notably acquiring the Circle K brand from ConocoPhillips in 2003. Not content to dominate in North America, it grew into Europe in the 2010s, acquiring Statoil’s fuel and retail assets for $2.8B. Its most recent big deal saw it buy another ~2,200 stores in Europe in 2023.

After a few more bolt on acquisitions, Couche-Tard now boasts nearly 17,000 locations spanning 29 different countries. It has 150,000 employees, sells 35M gallons of fuel every day, and puts through more than 8.5M customers each day. It’s truly a behemoth, and the share price recognizes that.

That’s a 17.9% CAGR over almost 20 years. Not bad, he said, trying to win the understatement of the year award.

As impressive as Couche-Tard is, certain issues pop up with size. The company has an enterprise value of $90B, and it’s the fifth-largest collection of convenience stores in the world based on number of outlets. Acquiring a few hundred units doesn’t move the needle as much in 2024 as it did in 2004.

Oil companies are also starting to realize that their convenience stores are good assets. Higher energy prices have given them some breathing room and allowed them to strengthen their balance sheets, which takes away the pressure to monetize non-core assets like convenience stores. Combine that with other acquirers busily making deals — like Canada’s own Parkland Fuel (TSX:PKI) — and people are suddenly questioning Couche-Tard’s growth ability. The stock is down a bit of late and has fallen from all-time highs.

Your author is still a bull, and I own Couche-Tard both personally and in our dividend growth model portfolio. But I’m also on the lookout for the next Couche-Tard, a company with great management, solid financial footing, and growth potential that can propel it to great returns.

Murphy USA (NYSE:MUSA) could very well be that stock. Here’s why it looks a lot like Couche-Tard did back in about 2005.

The skinny

Murphy USA was spun off Murphy Oil (NYSE:MUR) back in 2013. It operates more than 1,700 gas station and convenience store locations in 27 different states, serving more than 2M customers per day. Its gas stations are mostly located either nearby or adjacent to Walmart Supercenter stores, taking advantage of the large amounts of traffic attracted by the world’s largest retailer.

Most of its locations operate under either the Murphy USA or Murphy Express banners, but it does have 150 or so QuickChek locations. QuickChek was acquired in 2021 and is located in New York and New Jersey.

Unsurprisingly for a company with such close ties to Walmart, Murphy bills itself as a value play. It intentionally takes less margin in fuel but it makes up for it in volume. It also focuses on value inside of its convenience stores, using customer data from its loyalty program (with more than 1M members) to help it make decisions. It has an everyday low price (EDLP) model, which generates more traffic, which in turn generates more sales. It grows the top line without Murphy needing to invest any additional capital into a location and makes it popular with its budget-conscious customers.

Murphy isn’t just focused on improving same-store sales. It also has two organic growth paths. The first is identifying new locations — usually one where a Walmart has just opened or will open sometime soon — and it’ll build new locations there. It plans between 30 and 35 of these new stores in 2024.

The company will also raze and rebuild high performing kiosk locations, replacing them with 1,400 square foot convenience stores. It has averaged about 30 of these conversions each year since 2019, with an additional 35 to 40 planned in 2024. It has converted some 210 kiosks into standalone stores since the 2013 IPO. There are roughly 700 kiosks remaining out of 1,733 total locations, and I’d imagine all of them will be converted to c-store locations sooner or later.

This strategy has delivered growth in the exact place a gas station wants it — inside the convenience store. Combine that with Murphy’s steady effort to improve merchandise margins and move the mix of products sold away from tobacco, and the company has a pretty powerful two-pronged growth path.

As I’ve mentioned a few times, my job immediately before retiring was working at a regional grocer in Canada. Tobacco was part of my department, so I dealt with it a fair bit. And guys, take it from me — selling tobacco is a crummy business. You’re selling a commoditized product that’s available at 40 other places within a 10 minute drive. There’s really only one way to compete, and that’s on price. It attracts theft (from both employees and local dirtbags) and high taxes ensure the government is the real winner. Profit margins are slim and it’s harder to do volume versus 20 years ago since so many fewer people light up.

Murphy is pivoting from kiosks that basically only sell tobacco to real convenience stores that sell all sorts of things, and it’s a massively good move. Its merchandise margin has increased from 16% to 19.7% from 2019 to 2023, with non-tobacco margins increasing from 23.4% to 29.6% in the same period. Sales are increasing and margins are going up. It’s a powerful combination.

Merchandise profitability went from more than 60% tobacco in 2019 to 46% tobacco in 2023, and that’ll fall even more over time. Murphy has also embraced selling a lot of vaping products, helping its customers to make a better choice there — while also increasing margins.

Another important part of Murphy’s strategy is keeping costs under control. When you’re a value retailer and not making as much margin as competitors, cost control is imperative. Murphy has done a great job here; in 2022, the last year in which data was available, the average Murphy store had $34,200 in fixed monthly expenses, versus $61,000 for the industry. In 2023, which was another high inflation year, Murphy’s per-store operating expenses increased by just 4.9%.

Murphy also measures its coverage ratio, basically aiming to make enough from merchandise sales alone to pay for the entire store’s expenses. This leaves fuel as a pure profit.

Finally, like any fuel retailer, Murphy is looking to expand fuel margins whenever it gets the opportunity. Volatility is a plus for fuel margin, especially in 2022 when the energy market was particularly funky. Murphy has also told investors that inflationary pressures are forcing its competitors to try and get more margin from fuel, allowing it to undercut them while still getting better than average fuel margins.

Although fuel margins are off their 2022 highs, 2023’s numbers are still much better than 2019’s. There’s real improvement there.

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The opportunity

The opportunity here is simple. Murphy has a three-pronged growth approach that, combined with its relatively small size and fragmented U.S. convenience store market, give it a really interesting growth path.

And despite this growth potential, the stock trades at a very reasonable valuation. It pretty much trades as if there’s no growth expected and fuel margins are expected to compress.

I’ve already covered the first two growth avenues — building new stores and increasing merchandise spend inside those stores — so I’ll focus a bit on the third. Murphy acquired QuikChek in 2021 and is now focused on growing that brand. What’s stopping it from acquiring other similarly-sized chains?

Let’s go back to Couche-Tard’s latest investor presentation, which talks about how fragmented the U.S. convenience store market is. 60% of stores are single stores owned by one operator. That’s an investment universe of more than 90,000 stores. There are also dozens of chains with between 2-100 stores (12% of a market of 150,000+ stores, or approximately 18,000 stores) and more than 10,000 stores in the 101-500 store range.

Murphy is small enough even a couple of acquisitions over the next five years can really make an impact. It owns 1,733 stores today. It plans to add 35 stores per year, slowly ramping that up to 50 stores per year. Combine that with just one QuikChek-sized acquisition (150 stores), and that’s an additional 370 stores by the end of 2028, or growth of 21%. Add in further merchandise spend away from tobacco and increased merchandise sales from converting kiosks to real convenience stores, and I envision a world where adjusted EBITDA increases from $1.06B to $1.5B by 2027 or 2028.

And that’s the base case. The bull case sees Murphy make several acquisitions and ramp up the store build program, ultimately increasing the size of the company pretty substantially.

Onto valuation. Murphy earned $25.62 per share in 2023, putting the stock at just 16x trailing earnings. The bottom line is projected to increase to $27.57 in 2024 (a boost of 7.6%) and $30.03 per share in 2025. That puts us at less than 15x forward earnings.

I can see two risks to earnings over the short-term. The big one is fuel margins — if they normalize, Murphy’s bottom line will be hit. It is slowly moving away from being so dependent on gas, but it’s still an issue. The other is a general economic slowdown in the United States, which will hit Murphy’s core customer harder than wealthier folks. However, as the low-cost convenience retailer, Murphy isn’t so badly positioned in such a world.

Dividends and buybacks

I didn’t even mention this until now, because I like to put little surprises near the end.

Not only does Murphy offer everything I wrote about above, but it’s also one of the best share cannibals in North America. These guys gobble up shares faster than your author goes to town on a bag of Doritos.

When Murphy was spun off from its parent, the company had 46.8M shares outstanding. It has consistently repurchased shares consistently since the IPO, culminating with a 58% reduction in shares outstanding through the end of 2023.

Check this out. It’s a thing of beauty.

Murphy plans to keep plowing ahead with the share repurchases. In May 2023, it told investors it plans to spend $1.5B on share repurchases over the next five years. It spent $100M on repurchases from May through December, leaving it $1.4B to spend over the next 4.5 years.

Assuming a nice round number of 1M shares per year — which would currently cost around $400M per year, so it’s in the neighbourhood of possibilities — we’re looking at 16.8M shares outstanding by the end of 2027. That would be a 64% reduction in shares outstanding just 14 years after the spin. Fantastic.

For years, Murphy didn’t pay a dividend, choosing instead to give back to shareholders via those generous share buybacks. But that changed in 2020, when the company paid its first $0.25 per share quarterly dividend.

The payout has marched steadily higher ever since — increasing to $1.04 per share in 2021, $1.27 per share in 2022, and $1.55 per share in 2023. In fact, the payout has gone up each and every quarter since the first quarter of 2022.

The current dividend is $0.42 per share each quarter, which works out to a mere 0.41% yield. This is not a choice for investors looking for income today. The real attraction is the dividend growth. With a 6% payout ratio (nope, not a typo, it’s really that low) and the ability to raise the dividend a lot going forward, Murphy USA certainly looks poised to deliver on that front.

Dividend security: As high as you can get
Projected dividend growth: 10%+ annually

The bottom line

Murphy USA is a really interesting company that checks off a lot of boxes.

Its growth path is mostly organic, both from improving current locations and building new ones. Combine that with an effective effort to move away from tobacco sales inside the stores and the share repurchase program, and it doesn’t really need to make acquisitions to increase earnings over time.

I still think it does make an acquisition or two over the next few years, and it’ll take what it learned from the QuikChek deal to both better integrate the next asset and add to its existing stores — like it did with QuikChek’s food offerings, which are rolling out throughout the rest of the company.

Even if the growth doesn’t materialize like I predict, I’d argue the very reasonable valuation — the stock trades at 15× 2024’s expected earnings — is enough to ensure there isn’t huge risk on the downside. It looks to me like the market is already pricing in a more bearish scenario, and that’s despite the stock’s excellent short and medium-term track record.

Couche-Tard is heavily dependent on acquisitions to move the bottom line. It’s also limited to larger deals to really get investors excited. 50 or 100 locations won’t be enough. But such a deal would really make a difference to Murphy, especially combined with its solid organic growth and merchandise sales gains.

I’m not bearish on Couche-Tard, nor am I reconsidering my position. It’s a buy and hold for a very long time stock, even if it didn’t quite make my buy and hold forever list. But Murphy USA is also looking like a pretty attractive opportunity.

Author discloses his full portfolio for paid subscribers only. Nothing written above constitutes financial advice. Consult a qualified financial advisor before making any investment decisions.