By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics”
Murphy USA spin-off
In September 2013, Murphy USA Inc (NYSE:MUSA) completed the spin-off of its U.S. retail marketing business into an independent public company called Murphy USA Inc. Murphy USA markets refined products through a network of retail gasoline stations and unbranded wholesale customers. Murphy USA’s-owned retail stations are almost all located in close proximity to Wal-Mart Stores, Inc. (NYSE:WMT) stores in 23 states. As of November 2013, Murphy USA had a total of 1,193 locations which include 1,018 Murphy USA sites and 175 Murphy Express sites.
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In December 2013, Murphy USA Inc (NYSE:MUSA) announced that it has completed the sale of its wholly owned subsidiary Hankinson Renewable Energy, LLC which owns and operates the Hankinson, North Dakota ethanol plant to Guardian Hankinson, LLC. The price paid in the transaction was $170 million. The company’s CEO stated that the transaction represents a major step in executing the company’s strategy to exit non-core businesses while realizing significant value for shareholders.
During the first nine months of 2013, Murphy USA opened 21 retail locations. In addition, as of November 2013, the company has 22 sites under construction. According to the company’s disclosures, it intends to build approximately 200 additional sites in core markets on or near Wal-Mart Stores, Inc. (NYSE:WMT) locations over the next three years.
Murphy USA valuation
Based on a recent share price of $38.56 per share, Murphy USA Inc (NYSE:MUSA) had a market capitalization of $1.8 billion and an enterprise value of $2 billion (adjusted for $170 million in proceeds from the ethanol plant transaction). Murphy USA is valued at an EV/EBITDA multiple of x5.2 and P/E multiple of x9.6 based on the first nine months of 2013 annualized financials. The company generated approximately $248 million in free cash flow during nine months period ended September 30th 2013. This equates to an estimated annualized free cash flow of $331 million or a very healthy free cash flow yield of 18.3%. After adjusting for ethanol plant sale proceeds, Murphy USA will have a conservative amount of net debt on its balance sheet ($210 million). Cash and equivalents will equal approximately $432 million or 24% of company’s market capitalization. Assuming a future allocation of 30% of free cash flow to payment of dividends, it is reasonable to assume that Murphy USA might pay annual dividends in the amount of about $100 million, which would provide a 5.6% annual yield based on current market price.
Murphy USA Inc (NYSE:MUSA) was trading at a price of about $37.5 per share at the time of the spin-off. In the first 3 months the share price climbed to about $46 per share or 23%, which is indicative of an initial warm welcome of the company by investors. Recently the stock price declined back to about the same price at which it started trading. Murphy USA’s conservative valuation, little debt, growth potential and possibility of a future dividend payments provide an attractive entry point for investors who want a “second chance” to participate in this spin-off situation.