Casey's General Stores is Still a Good Buy

Casey's General Stores (NASDAQ:CASY) is about as steady as they come in terms of S&P 400 constituents. Shares of the convenience store operator have returned 14%, 24%, and 12% over the last three calendar years and have advanced another 12% already this year.

As a mid-cap defensive stock, Casey's General Stores is a good way to play the economic recovery—and more specifically represents a bet that Americans will be hitting the highways (and the gas pumps) this summer and beyond. Let's stop in to see what the company has been up to and where it may be headed.

What Did Casey's General Stores Announce for fiscal Q3?

This week Casey's General Stores reported fiscal third quarter results. For the three months ended January 31, 2021, revenue fell 10.7% to approximately $2 billion. Despite higher operating expenses tied to COVID-19 protocols, net income rose 13.7% to $38.6 million thanks to lower cost-of-goods-sold (COGS) and operating efficiency gains. Earnings per share of $1.04 beat the consensus estimate by a respectable $0.07.

When it comes to Casey's, the key performance measures in investors' eyes are those of the fuel business. Although 12% fewer gallons of gas were pumped in the third quarter, the segment's gross profit rose 37%. Casey's raked in profits of 32.9 per gallon of gasoline amid gradually climbing gas prices.

Inside the stores, same-store sales increased 2.1%. This was an encouraging result considering the comparison was to a pre-pandemic period. Much of this relates to strong digital sales which nearly doubled in the third quarter as the company's investments in its digital capabilities continued to pay off.

The mixed performance was far from groundbreaking, but as Casey's investors know, there is a bigger picture here.

What are the Growth Drivers for Casey's General Stores?

As one of the country's leading convenience store chains, Casey's General Stores depends heavily on automobile traffic, be it from travelers or truckers. Last quarter fuel sales accounted for 55% of overall sales—and that's at a time when fewer Americans were driving around for work and leisure. In past quarters fuel has been more like 60% to 70% of revenue with the grocery and prepared food segments accounting for the rest.

So, while people stopping in for a slice of pizza and a fountain drink doesn't hurt its financials, ultimately Casey's performance is dependent on the activity around its gas pumps.

The grocery side of the business generates a consistent 32% profit margin, while the fuel business is experiencing increasing profitability. After recording a fuel margin around 20 cents and 27 cents in fiscal 2019 and 2020, respectively, Casey's is one pace for a 35 cents margin in the current fiscal year with one quarter to go. Continued progress in the economic recovery, oil demand, and gasoline prices is the pathway to growth for Casey's.

The company exited the quarter with 2,229 stores in its footprint having added 19 net stores since the early stages of the pandemic. Although this demonstrates a level of cautious optimism, the pace of new store construction and acquisition will likely quicken as more pandemic uncertainty is lifted.

 Is Casey's General Stores Stock a Buy?

Casey's General Stores is trading just 5% from its all-time high but is still worth buying. The stock has enjoyed a steady long-term climb and is likely to keep marching higher as the economic rebound unfolds.

Sell-side analysts have been quick to call Casey's General Stores a 'buy' following the recent quarterly results. Four firms have reiterated their 'buy' ratings on the stock and the price targets range from $223 to $247.

Overall, the investment offers a nice blend of growth and value. Earnings growth has been around 9% historically and the valuation is reasonable. The forward P/E of 25x is slightly below the stock's five-year median. It also comes with a dividend yield that is less than 1% but has the potential to be raised as operating conditions improve. Some work is needed on the balance sheet front as there is $1.4 billion in long-term debt compared to a $389 million cash position.

In the meantime, surging gasoline prices point to the potential for strong results in the current quarter. According to GasBuddy.com, the average price of a regular gallon of gas nationwide is at its highest level in 18 months at $2.80. If this trend continues and people return to the roads as expected, Casey's General Stores stock may get the fuel it needs to keep running higher.