MUSA Stock: Solid Gas Sales, Fat Fuel Margins Stoke Murphy USA And Its Peers

Murphy USA (MUSA), Casey’s General Stores (CASY) and TravelCenters of America (TA) are enjoying a breakthrough year for the margins on their gas sales.

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The companies run fuel pumping stations as well as convenience stores. Selling gas is generally a low-margin business. Historically, sales from the stations’ convenience stores helps to bolster profit margins for the chains.

However, 2022 has been different. U.S. oil prices, trading below $77 a barrel since Saudi Arabia initiated its oil price war in 2014, rebounded sharply in late 2021 as Russia appeared set to wage war on Ukraine. The actual onset of that attack, in February, sent oil to its highest level since 2008.

Oil prices have backed away from those highs, but West Texas Intermediate crude was still set to average $95 a barrel in 2022, according to October estimates from the Energy Information Administration. Refiners and gas sellers typically pass those increases, and then some, through to consumers.

In addition, fuel demand rose with more Americans hitting the road and miles traveled in 2022 seen surpassing pre-pandemic levels. As a result, fuel sales, fuel profit contribution and fuel margins are all on up and rising.

“MUSA looks poised for another strong quarter, as Q3 looks near perfectly positioned against a banner period for fuel margins,” Wells Fargo analyst Anthony Bonadio wrote in an Oct. 20 note to clients.

Third Quarter Views Optimistic

Murphy USA, an IBD 50 stock, is due to report quarterly earnings on Wednesday. TravelCenters of America reports on Nov. 1.

Analysts polled by FactSet expect Murphy’s earnings to nearly double in Q3 vs. a year ago and to leap 74% for the full year vs. 2021. Fuel revenue is seen jumping 45% in 2022 vs. a 4% gain for tobacco, food and beverage sales. They forecast a 133% earnings explosion for TravelCenters this fiscal year and an 11% gain for Casey’s, also led by surging gasoline sales.

“We see a case for potential upside on both fuel margin and volume trends, as MUSA benefited from constructive margin dynamics and a value-seeking consumer,” Bonadio added in his Oct. 20 note. Portraying itself as a low-cost leader, Murphy says it has retained old customers and attracted new ones with cheap gas as prices rose.

A July survey of several cities by researcher CoPilot found Murphy’s gasoline prices to be among the lowest in the cities surveyed.

Meanwhile, Walmart (WMT), Kroger (KR), Costco (COST) and Albertsons (ACI), the nation’s four largest grocers by market share, are struggling with low or falling store visits, the latest data from foot traffic analytics firm Placer.ai shows.

On Oct. 14, Kroger agreed to buy smaller rival Albertsons for $24.6 billion, in a deal that could give Kroger a much-needed boost to falling foot traffic in stores, Placer.ai said.

Grocers at large face high inflation in food prices, higher costs and the rise of food delivery apps.

While grocers race to keep up, companies like Murphy USA are growing both sides of their business: gas stations and convenience stores.

‘Walmart Of Gas Stations’

Murphy USA, based in El Dorado, Ark., describes itself as engaging in low-cost, high-volume gas retailing.

El Dorado is just a half-day’s drive from Walmart headquarters in Bentonville, Ark. And, in fact, Murphy touts itself as “the Walmart of gas stations.” Murphy spun out from oil producer Murphy Oil (MUR) in 2013. Under a 2012 agreement, the unit built and operated gas stations under a partnership with Walmart.

When Walmart ended the arrangement in 2016, 1,100 of Murphy’s 1,300 stations at the time were located at Walmart supercenters. The companies have continued to work together at those established locations.

Subsequently, the locations near Walmart superstores help to drive a steady stream of value-seeking customers to company gas and convenience stores, under the Murphy and QuickCheck brands. The two companies partner on fuel discount programs.

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Nationally, gas prices at the pump averaged $3.83 per gallon on Thursday, according to the AAA Gas Prices site. That’s up 16 cents from a month ago and 48 cents above year-ago prices. The site showed prices as high as $6.96 at some locations in California.

Diesel prices have seen an even greater run-up. Shortly after Russia invaded Ukraine in February, the U.S. stopped buying crude oil from Russia. Much of that oil had supplied refineries producing diesel fuel, a segment of the U.S. refining complex already hurt by prior sanctions placing off limits oil from Iran and Venezuela.

The result, exacerbated by a rebound in U.S. trucking demand during 2021, led to a shortfall in diesel supplies. As a result, diesel prices — typically less expensive than gasoline — averaged $6.56 a gallon nationally on Thursday. That was $1.95 above year-ago levels: a 42% increase.

Casey’s, TravelCenters Stock

Ankeny, Iowa-based Casey’s focuses on small Midwestern towns and boasts a large prepared-foods business. It is arguably most famous for its gas-station pizza. TravelCenters of America is essentially a truck-stop chain, targeting professional truck drivers and highway motorists. A rival, Pilot Flying J, is owned by Warren Buffett’s Berkshire Hathaway (BRKB).

For the entire group, fuel is the mainstay. It makes up more than three-quarters of total revenue for Murphy USA, 73% for TravelCenters and 65% for Casey’s.

As gas and diesel sales stoke earnings this year, MUSA stock has climbed 39% year to date. Shares are currently in a flat base with a 303.19 buy point. The base-on-base pattern is the stock’s second third-stage base.

The stock’s advance, against the backdrop of a struggling market, sent the relative strength line of this IBD 50 stock to new highs on the weekly MarketSmith chart. A rising RS line shows a stock is outperforming the S&P 500.

CASY stock is also beating the market, but holds a more modest 5.3% gain so far this year. Shares are below a 224 buy point in a flat base, with its RS line also making a new high, shown by a blue dot at the end of that line on the weekly chart. TA stock is also acting well, up more than 10% for the year and holding above the 50-day line and with its RS line also making highs.

The super/mini markets retail group currently ranks a solid No. 31 out of 197 industry groups tracked by IBD. Out of 13 stocks in this group, Murphy USA ranks No. 1 for Composite Rating and EPS Rating, and No. 2 for RS Rating, behind TravelCenters of America.

Meanwhile, oil tanker stocks are also hitting highs in the current market.

Murphy USA: Leader In Low-Price Gas Sales

In the first half of 2022, rising oil and wholesale fuel prices rapidly led to higher prices at the pump. In this environment, Murphy’s pricing strategy helped it retain established customers while attracting new customers.

Despite steep gas prices and a 40-year high in inflation during this period, the company claims to have gained market share.

“Despite known pressures impacting take-home pay, we are clearly seeing our low price offer resonate (with) more and more value-seeking customers,” Murphy USA CEO Andrew Clyde said on a July 28 earnings call.

The company says it buys fuel at extremely competitive industry benchmark prices and sells it cheaper than rivals. It analyzes intraday supplies and directs fuel tanker trucks to the most favorably priced terminals.

Murphy says its low-cost business model leads to a lower fuel break-even point than competitors.

Gas Sales, Margins In Focus

In the June quarter, Murphy’s fuel same-store sales (sales at stores in operation for at least one year) grew 4.8%. That compared to increases of 1.5% for tobacco comparable sales and 1.4% for other merchandise comp sales.

As more customers flocked to its stores for gas, Murphy’s retail fuel volumes grew 8% vs. a year ago and retail fuel contribution dollars jumped 31%. Retail fuel margin climbed 22% despite higher commodity prices.

Both fuel margin and fuel contribution are key profit metrics.

By comparison, Murphy’s Q2 food and beverage contribution dollars grew 9% while food and beverage margins rose 5%. Fuel sales, gauged in same store gallons, decreased 2.3%.

Its rivals saw somewhat similar margin trends. For its June quarter, TravelCenters’ fuel and non-fuel margins grew by 56% and 10%, respectively. For its July quarter, Casey’s fuel margins rose 27%, to 44 cents per gallon, while non-fuel margins fell 70 basis points.

“The fuel margin environment was especially favorable in the second half of the quarter as wholesale costs declined from record highs,” Casey’s CEO Darren Rebelez said in a Sept. 7 earnings release.

Walmart and Costco, two of America’s biggest retailers, also sell some of the cheapest gasoline. Walmart offers low member prices on fuel and Costco offers store coupons to its members when they fill up, with both also using gasoline sales to draw customers inside.

Fuel Volume, Fuel Margin Trends

When Murphy reports its Q3 results on Wednesday, investors will get a better look at how fuel volume and fuel margin trends are playing out.

Industry data points to softer Q3 fuel volumes, down 6%-7% year over year amid elevated fuel prices. But Southeast fuel margins, closely tracked by Murphy USA, leapt 87% in Q3, according to OPIS (Oil Price Information Service), benefiting from a sizable fall in wholesale prices during the quarter.

The latest AAA data shows retail gas prices have eased from a week ago, though they are still up from a month ago and year ago. Fears of a global economic recession brought on by aggressive rate hikes by central banks have led to a big drop in crude oil prices, taming prices at the pump.

Meanwhile, fewer drivers are fueling up, according to AAA. If the widely-feared recession does take shape, both crude prices and gasoline demand are likely to fall further.

In an Oct. 14 note to clients, Raymond James analyst Bobby Griffin cautioned that the industry’s fuel gallons are under pressure and elevated fuel margins are not sustainable.

Yet he likes MUSA stock for its low-cost strategy and Walmart exposure, rating it at outperform with a $315 price target.

At Wells Fargo, analyst Bonadio sees a case for structurally higher post-Covid fuel margins. But he believes MUSA stock faces “longer term headwinds given significant fuel and tobacco exposure (and) a comparatively weak inside business,” keeping him on the sidelines.

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