Casey’s General Stores (NASDAQ:CASY) Is Levered For Earnings Growth

Casey’s General Stores Falls After Earnings

Casey’s General Stores (NASDAQ:CASY) has staged a massive rebound since hitting the March lows. The rally in share prices is largely due to the rebound, it has been better than expected, but there is more to the story than just sales. The company has been working hard to cut costs, operate with higher efficiency, and boost profitability and those efforts are working. The company is increasing its earnings on a YOY basis despite negative YOY comps which means there is a lever for earnings as revenue increases.

Casey’s Beats Top And Bottom Line Estimates

Casey’s is another case in which the revenue beat, no matter how small, is significant. The consensus target for calendar Q3 EPS is up more than 35% from the summer lows and evidence of mounting expectation for good results. So, the top-line revenue came in at $2.22 billion or down -10.8% from last year. The revenue beat the consensus by $20 million or about 1.0% and is up 5.2% on a sequential basis.

Revenue gains are due to strength in all operating segments, specifically fuel profitability and inside-sales, which should both continue to expand along with the economic rebound. Not only is growth expected to improve on a comp-basis but the company just made its largest purchase ever. Case’s General Stores bought 94 Bucky’s units in Illinois and Nebraska further expanding the company footprint.

On a segment basis, fuel gross profits increased 45% over the course of last year due to widening margins. Margins are up on a combination of higher realized selling prices coupled with efficiency efforts from within. Fuel gains were slightly offset by an 8% decrease in comp-store gallons but gallons sold is on the rise. Regarding inside-sales, inside sales are up 2.5% YOY and underpinned by eCommerce. Oddly enough, Casey’s General Stores has been able to leverage e-channels to the tune of 127% YOY with the aid of a rewards program. The rewards program now has more than 3 million members.

“Casey’s had a remarkable second quarter and is well on our way to executing our long-term strategic plan,” said President and CEO Darren Rebelez. “The Company delivered well-balanced financial results, with contributions from both ongoing strong fuel profitability and inside sales volume and profit improvements.”

Casey’s Pays A Safe And Growing Dividend

Casey’s doesn’t pay much in the way of yield but it offers a lot in terms of growth and safety. The company has been increasing for over 20 years, just increased for the 21st time, and has no reason not to increase again and again long into the future. At the current payout, about 0.72% in yield, the payout ratio is a mere 16% of earnings and the balance sheet is a near-fortress. The company has a modest amount of debt but is well-capitalized with ample free-cash-flow.

“the Board's decision to raise the dividend is a sign of continuing confidence in the Company’s ability to achieve strong financial results and maintain our already excellent financial flexibility in both the short and long term,” continued Mr. Rebelez.

The Technical Outlook: Near-term Correction Will Lead To Long-Term Gains

Shares of Casy’s General Stores look like they will move sideways within a trading range for the near-term but the long-term outlook is bullish. Not only is the company set up for a major rebound in earnings it is growing through acquisitions that will add mid-single to low-double-digit revenue growth over the next couple of quarters.

Add in the fact that the company has smartly beaten the consensus the first two fiscal quarters of the year and the consensus targets are not only too low, but the company’s valuation is off as well. Basically, price action may show weakness in the near-term but there are lots of reasons for buyers to step in. Regarding the analysts, the analysts have been warming up to this stock over the last three months. The consensus rating has steadily risen from a hold to a buy/strong buy with a price target near $204. The high-price target of $246 is held by Jeffries and implies a 36% upside.