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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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The Stock That Keeps Going Up As Gas Prices Fall

The Stock That Keeps Going Up As Gas Prices Fall

Most companies in the energy industry are hurting as oil prices fall. There are exceptions of course, like refiners and tankers that can be good investments in some special circumstances when energy markets are challenging. Yet most companies in the space need rising or at least reasonably high oil prices to be considered really strong investments. There is one exception to this rule – a stock which directly benefits from lower gasoline prices – and that company has seen monster gains over the last year as oil prices have tanked; Casey’s General Stores; Inc.

Casey’s General Stores trades under the ticker symbol CASY. Casey’s operates roughly 1,800 convenience stores across the Midwest U.S. selling food, drinks, auto supplies, and gasoline. There are very few other publicly traded gas station/convenience store companies, and none with Casey’s pure focus and growth opportunities. Casey’s has benefited from gasoline’s falling price because as the price of gas falls, consumers become more willing to go into Casey’s stores and buy one of its high-margin in-store items rather than just buying low margin gasoline. Related: Stop Blaming OPEC For Low Prices

The stock has had a huge run this year, rising from a low price below $80 a share to nearly $110 in recent days while appreciating in basically a straight line. That same pattern has held over the last few years as the company has executed its strategic plan and grown earnings accordingly. Investors have rewarded the firm by pushing its stock up almost three-fold in the last five years.

At its last quarterly report in September, CASY beat earnings numbers by a whopping $0.18 a share ($1.57) while revenues came in above expectations by $50 million. The firm’s earnings have grown consistently over time as its filings show. Casey’s is benefiting from a new store expansion, its rollout of pizza delivery, and increased operating hours (including 24 hour operations) at many locations. Related: Banks Give A Stay Of Execution On Oil And Gas Sector

The benefits of being a publicly traded company for a firm like Casey’s are primarily from access to cheap capital. This access has helped Casey’s to start rolling up independent locations across its industry, which is giving it considerable growth opportunities. The firm has been growing its square footage in the mid-single digit rate through a combination of small acquisitions and organic growth, a trend which is likely to continue. While Casey’s competes against other big firms in the gas station business from Kroger and Costco to Murphy USA and CST Brands, none of these peers has been able to build on the opportunities in the current environment like Casey’s has. Related: U.S. Shale Drillers Running Out Of Options, Fast

In addition, the firm’s growth and profit initiatives under CEO Robert Myers helped to fuel consistent same store growth. Myers announced last July that he was stepping down, but the initiatives the firm has embarked on should continue under new CEO Terry Handley, the former COO.

For investors looking for a way to benefit should gasoline prices stay lower for longer than expected, Casey’s may be a great opportunity. The firm’s moves to increase high margin prepared food offerings, grow its store count, and expand its hours all dovetail nicely with consumer’s appetite for increased travel (and higher gasoline demand) thanks to low fuel prices. The firm earned $4.62 per share for fiscal year 2015 and looks like it is on track to grow that number circa 10 percent to around $5.10 a share in FY 2016. For investors, that should be a recipe for continued strong stock price appreciation as the positive structural story continues.

By Michael McDonald of Oilprice.com

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