Murphy USA: Promising New Initiative Not Reflected in Valuation

Jeff Sutton of ValueTree Investments presented his in-depth investment thesis on Murphy USA (US: MUSA) at Best Ideas 2019.

Thesis summary:

Murphy USA operates 1,461 gas stations and convenience stores, primarily across the Southeastern and Midwestern U.S. The company has historically partnered with Walmart for 1,160 locations, which are often located in Walmart parking lots. In recent years, Murphy has diversified operations away from its dependence on Walmart by opening 301 standalone convenience stores. These standalone stores offer higher profit margins due to retail merchandise sales, as opposed to earning a small margin almost entirely from gasoline sales at other locations.

The company’s newest initiative (announced in early 2016) to “raze and rebuild” many of its existing Walmart locations offers upside potential. Murphy recently traded at $74 per share, a trailing P/E of ~15x, EV/EBITDA of ~8x, and price to cash flow of ~7x. Valuing the company at peer multiples of ~20x earnings, ~10x EBITDA, and ~10x cash flow suggests that Murphy could be worth $105 per share. According to Jeff’s analysis, applying the potential results of the “raze and rebuild” program to recent valuation multiples suggests a value of $107 per share. Combining the potential impact of the initiative with higher peer multiples would imply a stock price of $148 per share.

Murphy owns the majority of its real estate locations. Analyzing the possibility of a sale-leaseback transaction suggests the company could be worth $135 per share. Jeff estimates that the company generates $268 million in normalized maintenance FCF. Applying a 7% FCF yield indicates that Murphy may have intrinsic value of $119 per share, or as high as $159 per share if the “raze and rebuild” program is successfully implemented company-wide.

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About the instructor:

Jeff Sutton has over 18 years of investment experience, and has been a Chartered Financial Analyst (CFA) charterholder for over 14 years. Prior to founding ValueTree, he worked as an equity analyst for a long-short hedge fund, as a project manager at a $1 billion family office, and as an associate at a Southeastern private equity firm. Academically, Mr. Sutton graduated summa cum laude and Phi Beta Kappa from Rhodes College with two B.A. degrees, with majors in International Business and French. He has served as a member of the Rhodes College Alumni Executive Board. He has also earned a Master of Business Administration (MBA) degree from the Darden Graduate School of Business Administration at the University of Virginia, where he was the Senior Portfolio Manager of the Darden Fund.