Expanding Stores And Innovating Digitally Fuels Growth Amid Market Challenges

Key Takeaways

• Expansion strategy and digital investments aim to amplify customer experience and operational efficiencies, fostering revenue and margin growth.
  
• Shift towards noncombustible tobacco products and a steadfast low-price strategy, coupled with an aggressive share repurchase program, seeks to bolster margins and shareholder value.
  
• Increasing operational costs and competitive pressures, alongside inflation and geopolitical uncertainties, may squeeze margins and affect revenue across merchandise and fuel segments.

Catalysts

Engages in marketing of retail motor fuel products and convenience merchandise.

• Robust store expansion and the raze-and-rebuild strategy will likely increase store footprint and enhance customer experience, driving revenue growth.
  
• Focused investments in technology and digital transformation initiatives are expected to enhance operational efficiencies and improve margins through better inventory and price management.
  
• Continued emphasis on the tobacco category, including the transition to noncombustible products, is anticipated to sustain and grow margin dollars, benefiting overall merchandise margins.
  
• Commitment to everyday low price (EDLP) strategy and value pricing in response to persistent inflation impacts on customers could drive traffic, increase transaction volumes, and solidify customer loyalty, supporting revenue stability and growth.
  
• Aggressive share repurchase program underlines strong cash flow management and the potential for earnings per share (EPS) accretion, contributing positively to shareholder value.

Assumptions

• Analysts are assuming Murphy USA's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.8% today to 2.7% in 3 years time.
• Analysts expect earnings to reach $607.1 million (and earnings per share of $30.59) by about October 2027, up from $528.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.8x on those 2027 earnings, up from 18.5x today. This future PE is greater than the current PE for the US Specialty Retail industry at 14.5x.
• Analysts expect the number of shares outstanding to decline by 1.06% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.21%, as per the Simply Wall St company report.

Risks

• Persistent inflation particularly affecting discretionary spending categories could diminish consumer purchasing power, impacting merchandise sales and overall revenue.
  
• Intensified competitive pressures, especially from quick service restaurants (QSRs), could erode market share in key merchandise categories such as prepared food and beverages, affecting merchandise margin growth.
  
• The challenge of driving traffic and increasing transactions in specific markets like the Northeast, where inflation impacts are more pronounced, could negatively affect same-store sales growth and overall revenue.
  
• Operational expenses on a per-store basis continue to rise due to factors like wage investments and maintenance costs, potentially squeezing net margins if revenue growth does not offset these increases.
  
• Geopolitical uncertainties and potential volatility in fuel prices could impact fuel margins and volumes, affecting the company’s core fuel business revenue and profitability.

Valuation

• The analysts have a consensus price target of $486.43 for Murphy USA based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $590.0, and the most bearish reporting a price target of just $325.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $22.2 billion, earnings will come to $607.1 million, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 7.2%.
• Given the current share price of $477.21, the analyst's price target of $486.43 is 1.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.