GrizzlyRock Capital On The Long Case For Murphy USA

GrizzlyRock Capital On The Long Case For Murphy USA

GrizzlyRock was recently invited by Institutional Investor and SumZero to present a top idea at their emerging manager event in New York. The following is an excerpt from the presentation. Murphy USA, Inc. (“Murphy”, “MUSA” or the “Company”) is a leading convenience store & gasoline retailer in the US Southeast with 5% market share by volume in their geographic area. Murphy USA Inc (NYSE:MUSA) is directly intertwined with Wal-Mart Stores, Inc. (NYSE:WMT) as the vast majority of Murphy gas stations are located in or around a Walmart parking lot. Similar to Walmart with respect to pricing, Murphy is a price leader compared to most gas stations and compensates by driving significantly more volume (2x to 4x) than many other stations which focus on convenience store products.

In 2012, the Company derived 78.3% of revenue from fuel sales, 11.3% merchandise sales, and the remaining 10.4% are fuel excise taxes (direct pass-through to the government with no margin).

A recent spin-out from exploration & production giant Murphy Oil Corporation (NYSE:MUR), Murphy USA Inc (NYSE:MUSA) began trading in late August 2013 and priced at 6.2x TTM EBITDA and 12.6x TTM EPS on November 7th. Currently, shares are priced below both a conservatively estimated base case DCF value of ~$66 per share (see page 10 herein) as well as estimated replacement value of $2.6 billion for tangible asset value as described on page 14 (i.e. no attributed value to the lengthy & significant Walmart relationship).

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The following attributes make Murphy USA Inc (NYSE:MUSA) an attractive long-term investment at the current price:

  • Low Operating Cost Model: Murphy is a low-cost operator focused on volume versus in-store sales (divergent from peers). Murphy has the lowest cash break even cost (+6.6 cent margin per gallon of gasoline) and a smaller average store which requires less labor cost and maintenance expense.

Murphy sources low-cost fuel by (1) ownership of midstream assets such as terminals (2) shipper status on the colonial pipeline and (3) flexibility to purchase non-branded fuel from the lowest cost supplier at any time and any location.

  • Solid Financial Profile: Murphy USA Inc (NYSE:MUSA) is underlevered with 1.0x Debt to LTM EBITDA at 9/30/13 and consistently generates significant EBITDA and FCF. Additionally, the Company generates solid returns on invested capital (in excess of 15% pre-tax)
  • Attractive Valuation: At the current price of ~$42 per share, Murphy USA Inc (NYSE:MUSA) trades below its conservatively estimated convenience store replacement value of $2.2 million per unit ($44 per share) and at 6.2x EBITDA

Murphy’s 6.2x EBITDA multiple is ~2x below competitors such as Susser Holdings Corporation (NYSE:SUSS) (as shown on page 13), which equates to a base case target price of ~$60 which is nearly 50% upside from current prices.

  • Growth Opportunities: The Company has significant growth opportunities, as it recently entered into an agreement with Wal-Mart Stores, Inc. (NYSE:WMT) to build an additional 200 stores near/or on Walmart locations.
  • Leading Market Position: Murphy maintains a ~5% market share by volume in their geographic markets. Market share helps with scale as the Company can purchase merchandise in bigger quantities versus mom and pop convenience operator (62.9% of total convenience stores per NACS) and source fuel efficiently.
  • Spin-Off from Larger Parent: The spinoff of Murphy has created vast mispricing. Forced selling has created an opportunity with the business trading below its conservatively estimated replacement value.

Via GrizzlyRock Capital

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