How To Get 30% Upside By Investing In Convenience Stores

In a report published Monday, JPMorgan analyst Matthew Boss explored the convenience store sector, noting that low gas prices could prove to be a "potential positive" over time given higher margin in-store merchandising.

According to Boss, the sector experienced a 30 percent pullback since April which justifies a revised investment thesis, especially when factoring the new realities of $40 to $50 crude which can even decline as low as $20 per barrel. In fact, the analyst argued that the price of oil is "irrelevant structurally" to the convenience store operators.

Murphy USA Upgraded To Overweight

Boss upgraded shares of Murphy USA Inc MUSA to Overweight from Neutral with a price target lowered to $65 from a previous $69 following a 33 percent decline in the stock since April.

Boss said that crude volatility translates to margin opportunity as consumers are likely to spend less at the pump and spend some of the gas savings in-store merchandises at a higher margin price point. In addition, the company could see growth from cash flow optionality (with cash flow from operations approaching $250 million) with store growth acceleration rather than a share buyback program.

Boss also held a conversation with Murphy's management and offered four key takeaways:

• 1) Murphy's is considering a store growth acceleration with a renewed Wal-Mart Stores, Inc. WMT with a potential acceleration of store growth to 120 units per year. Meanwhile, a "plan B" option is also on the table which consists of expanding Murphy Express to 100 new units per year (versus 70 per year).
• 2) Management is exploring the sale of two non-core assets (Hereford Ethanol Plant and CAM Pipeline) given an acceleration in cash flow from operations which is expected to reach 12 percent of the company's market cap in fiscal 2017.
• 3) Murphy's two-year restriction following the spin out of Murphy Oil expired at the end of August and provides the company with increased optionality on the capital allocation front.
• 4) Management reiterated that sustained lower gas prices with the potential to expand margins.

Final Remarks

Boss concluded that Murphy's "unique" business model (low cost, high volume) can sustain itself over the long term with a projected mid-teens earnings growth model in 2016/17.

Image credit: @LIQUIDBONEZ, Flickr