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Coverage Initiation: Murphy USA
Value Line has initiated coverage of Murphy USA Inc. (MUSA) in its flagship product, The Value Line Investment Survey. Murphy operates a large chain of retail stations (1,172 as of March 31, 2013) that sells motor fuel products and convenience merchandise. The company has over 7,300 employees and was incorporated in Delaware on March 1, 2013. It is headquartered in El Dorado, Arkansas. Its stock was spun off from Murphy Oil Corp. (MUR) and began trading on the NYSE on August 29, 2013.
The company’s retail stations are located in 23 states, mostly in the Southern and Midwestern United States. Of its locations, 1,016 are branded as Murphy USA and 156 are standalone Murphy Express stores. Nearly all of its stores are located near Wal-Mart (WMT – Free Wal-Mart Stock Report) stores, as most of its Murphy USA stores participate in the Wal-Mart discount program, which offers a cents-off per gallon discount on fuel when using specific methods of payment. Murphy also owns and operates two ethanol production facilities, one each in North Dakota and Texas.
The company has two segments: Marketing and Ethanol. The former group derives revenues (89% of the 2012 total) from the sale of petroleum products and merchandise. The latter division derives revenues from the manufacture and sale of ethanol to third parties.
Since the majority of its stores are so close to a Wal-Mart, the company believes it benefits from its significant customer traffic. Its collaboration with Wal-Mart on a fuel discount program gives it an advantage over its competitors. The two firms have had a relationship since 1996, and in late 2012, Murphy signed an agreement that will allow it to build roughly 200 new sites on Wal-Mart locations, which should be completed in the next three years.
Murphy believes the fuel it sells is competitively priced and, despite the flat long-term outlook in overall gasoline demand, it thinks value-oriented customers represent an expanding demand segment. The company’s stores also lead the industry in per-site tobacco sales, thanks to its low prices.
Murphy’s emphasis on fuel sales, and not on convenience items, allows for a smaller store footprint than many competitors. Nearly all of its locations are standard 208 or 1,200 square foot kiosks, which typically have low capital costs and maintenance requirements. The stations also typically only require one or two attendants, and are typically on company-owned property, so they do not incur rent expense. These cost advantages translate into a lower fuel breakeven point that allows Murphy to weather extended periods of lower fuel margins.
The company faces certain business and industry related risks. Since the company is primarily a seller of fuel, the volatility in the global prices of oil and petroleum products, along with general economic conditions, can significantly impact results. Since Murphy’s business is closely connected to that of Wal-Mart, any friction in that relationship could prove catastrophic. A significant amount of the company’s retail sales involve payment using credit cards, and it is assessed credit card fees as a percentage of transaction amounts, as opposed to a fixed dollar amount. As a result, higher gasoline prices translate into higher fees, and this can lower margins.
Nearly 80% of the company’s merchandise sold is purchased from a single supplier, McLane’s Company. Any disruptions or contract dispute with that firm could hurt results. The industry in which the company operates is also very competitive, and includes several independent retail and wholesale gasoline marketing companies. Murphy is also facing increased competition from other retail fueling stations that are associating with non-traditional retailers, including supermarkets and discount club stores. This trend is expected to continue, resulting in a tougher battle for market share over time. Murphy also faces competition for its merchandise, including from convenience stores, drugstores, gasoline service stations, and even fast food operations.
Business prospects at Murphy USA are mixed. While the company has posted lower revenues through the first nine months of 2013, compared to last year, the bottom line has expanded, thanks to higher fuel margins per gallon, along with better income from ethanol plant operations. However, the business is volatile, and the company also has a large amount of debt on its balance sheet (roughly 53% of total capital as of September 30, 2013).
Subscribers interested in learning more about this operator and owner of motor fuel retail stations are advised to consult Value Line’s quarterly reports for Murphy, as well as any supplemental reports and relevant articles that may arise as important news comes to light.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.