Fikes And CEFCO Integration Will Strain Margins But Unlock Upside

Key Takeaways

• Acquisitions of Fikes and CEFCO stores are currently dilutive to earnings, impacting margins due to higher integration costs and lower initial store performance.
  
• Weather variability and efficiency limits may constrain near-term revenue and margin improvements, creating uncertainty in quarterly results and operating performance.
  
• Casey's robust growth, strategic acquisitions, and strong financial position enhance its potential for sustained revenue growth and profitability in the food and fuel sectors.

Catalysts

Operates convenience stores under the Casey's and Casey’s General Store names.

• Casey's acquisition of the Fikes stores is expected to be EPS dilutive in the fourth quarter due to incremental interest expense, higher depreciation and amortization, and additional integration costs. This could pressure earnings metrics until synergies are fully realized.
  
• The CEFCO stores acquired have lower margins than Casey's traditional store base, dragging down the consolidated fuel and food margins. This margin pressure could affect overall profit margins until the stores are fully integrated and their offerings optimized.
  
• The integration of new acquisitions such as Fikes and CEFCO involves significant integration costs and operational challenges, which may strain cash flows and temporarily inflate operating expenses, impacting net margins.
  
• Weather-related factors and leap year comps have impacted same-store performance, with guidance suggesting that the fourth quarter results may be below the annual range. This variability introduces uncertainty in quarterly revenue projections and overall top-line growth.
  
• Labor hour reductions and efficiency gains have been a focus, but there is limited runway left in same-store labor hour reductions, potentially capping future operating margin improvements from this initiative.

Casey's General Stores Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Casey's General Stores compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Casey's General Stores's revenue will grow by 5.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.4% today to 3.7% in 3 years time.
• The bearish analysts expect earnings to reach $707.7 million (and earnings per share of $19.15) by about July 2028, up from $546.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 29.8x on those 2028 earnings, down from 35.6x today. This future PE is greater than the current PE for the US Consumer Retailing industry at 22.3x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.62%, as per the Simply Wall St company report.

Casey's General Stores Future Earnings Per Share Growth

Risks

• Casey's General Stores reported inside sales growth of over 15% and a 20% increase in fuel gallons sold, indicating strong consumer demand and potential revenue growth.
  
• The company achieved a same-store sales increase of 3.7% in prepared food and dispensed beverage categories with a margin of 57.8%, highlighting robust performance and potential for earnings growth in these segments.
  
• Casey's successful integration of large acquisitions, like the significant Fikes transaction, has historically been managed well, potentially driving future revenues and profit synergies.
  
• The strategic plan focusing on accelerating the food business and enhancing operational efficiency could result in sustained revenue and margin improvement, potentially boosting returns.
  
• A strong balance sheet with a leverage ratio of 2.1 times EBITDA and substantial liquidity of $1.3 billion positions Casey's well for future investments and financial stability, potentially enhancing earnings.

Valuation

• The assumed bearish price target for Casey's General Stores is $470.93, which represents two standard deviations below the consensus price target of $538.37. This valuation is based on what can be assumed as the expectations of Casey's General Stores's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $584.0, and the most bearish reporting a price target of just $450.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $18.9 billion, earnings will come to $707.7 million, and it would be trading on a PE ratio of 29.8x, assuming you use a discount rate of 6.6%.
• Given the current share price of $524.0, the bearish analyst price target of $470.93 is 11.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.