Declining Fuel Demand And Rising Costs Will Squeeze Margins

Key Takeaways

• Accelerating EV adoption, regulatory pressures, and changing retail trends are creating persistent headwinds for fuel demand, in-store sales, and overall revenue mix.
  
• Operational risks from Walmart location dependence and intensifying competition threaten earnings stability and limit margin expansion amid rising costs.
  
• Sustained expansion, cost discipline, diversified nonfuel growth, stronger fuel margins, and focused capital allocation are supporting higher profitability and long-term shareholder value.

Catalysts

Together with subsidiaries, engages in marketing of retail motor fuel products and convenience merchandise.

• The long-term transition to electric vehicles is accelerating and, even if combustion engines remain dominant in certain regions for several years, Murphy USA faces a material risk of declining fuel volumes as EV adoption penetrates more suburban and rural markets. As core fuel demand contracts, this will depress top-line revenue, especially in mature stores, and create persistent headwinds for same-store sales growth.
  
• Regulatory pressures-including proposed climate policy, rising carbon taxes, and the increasing costs of compliance-threaten to erode the profitability of fossil fuel retailing. As the burden of meeting environmental standards rises over the coming decade, Murphy USA will likely see operating expenses increase and net margins compress, undermining longer-term earnings power.
  
• The proliferation of e-commerce, food delivery, and on-demand retail solutions continues to steadily reduce foot traffic to physical convenience stores. This secular shift is projected to diminish in-store transaction volume and curb the growth of high-margin merchandise sales, weighing on Murphy USA's overall revenue mix and limiting merchandise contribution margin expansion.
  
• Murphy USA's heavy concentration of locations adjacent to Walmart stores exposes it to substantial operational risk if Walmart shifts partnership strategies or undergoes its own competitive disruptions. This dependence could lead to abrupt drops in store traffic and regional revenue, with limited flexibility to offset such losses, causing increased volatility in earnings.
  
• Intensifying competition-from both traditional fuel and newer market entrants, especially in highly price-sensitive markets-threatens to erode Murphy USA's limited pricing power. Combined with ongoing labor and supply cost inflation within the low-margin convenience retail segment, this will make it increasingly difficult for Murphy USA to sustain or grow net margins, particularly as fuel price volatility increases.

Murphy USA Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Murphy USA compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Murphy USA's revenue will grow by 6.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 2.9% today to 2.6% in 3 years time.
• The bearish analysts expect earnings to reach $529.1 million (and earnings per share of $28.04) by about August 2028, up from $490.5 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 13.7x on those 2028 earnings, down from 15.5x today. This future PE is lower than the current PE for the US Specialty Retail industry at 18.6x.
• Analysts expect the number of shares outstanding to decline by 5.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.0%, as per the Simply Wall St company report.

Murphy USA Future Earnings Per Share Growth

Risks

• Sustained store expansion, with a robust pipeline of new builds and raze-and-rebuilds, is likely to continue widening Murphy USA's revenue base and boost total earnings by increasing the number of high-performing locations in growth markets.
  
• Demonstrated operational cost discipline and continuous implementation of productivity initiatives, including technology-driven efficiencies in labor and maintenance, are lowering operating expenses and supporting margin expansion, which can offset revenue pressures and strengthen net income.
  
• Resilience and growth in nonfuel categories-especially with merchandise, foodservice, private label offerings, and loyalty-driven engagement-are raising per-store merchandise contribution, improving profitability outside of fuel, and insulating overall earnings from fuel market volatility.
  
• Structural improvements in retail fuel margins, aided by industry consolidation and Murphy USA's low-cost, high-traffic site model, are allowing the company to capture a larger share of available profit per gallon and maintain stronger EBITDA even during periods of softer volumes.
  
• A disciplined capital allocation strategy, combining aggressive share repurchases and continued investment in new stores across suburban and underserved areas, supports long-term earnings per share growth and free cash flow generation, reinforcing the company's ability to deliver value to shareholders.

Valuation

• The assumed bearish price target for Murphy USA is $350.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Murphy USA'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 $600.0, and the most bearish reporting a price target of just $350.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $20.5 billion, earnings will come to $529.1 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 9.0%.
• Given the current share price of $393.67, the bearish analyst price target of $350.0 is 12.5% 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.