Description

Mr. Market has lost his mind on MUSA.  We are currently in a situation where the market is valuing a predominantly gas station kiosk business that sells cheap gas and cigarettes at the same multiple (10-11x EBITDA) as some of the most valuable energy transportation / export infrastructure companies in the US (eg. Enterprise Product Partners or Cheniere Energy).  To make this even more comical, MUSA isn’t really a growth business – its dual melting ice cube of gasoline and cigarette sales.  At least EPD and LNG are growing as the US becomes a larger exporter of crude oil and natural gas – a dynamic which is unlikely to go the other way for a long time.  As this is happening at a time where the market has gone bananas on electric vehicles with Tesla having an Enterprise Value of $86 billion.   How can the market be so bullish on EV demand / penetration yet not seem to worry at all about domestic gasoline retail volumes?

MUSA has been written up several times on VIC, the last two times as a short.  So, I am not going to rehash everything.  I do however suggest you read the prior write-ups to get some perspective.  The crux of short thesis is as follows:

Valuation

MUSA is egregiously overvalued for what it is.  Up until the last year or so, it traded at a well deserved structural discount to its peers (eg. Casey, Couche-Tard).  The reason made a lot of sense to me.  MUSA is primarily a kiosk / small form factor box that was historically joined at the hip to Walmart.  So the business was designed to sell max gasoline volumes and be a tobacco destination.  It was not designed to be a convenience store destination where you walked into a 2,000-3,000 sq foot box to buy your hot dog, chips, soda, play the lotto, and buy a pack of smokes while you topped off your Ford Mustang.  It didn’t really have that retail draw.  So, to me, trading at 7-8x EBITDA while the “Dollar Generals” of the gasoline world traded 10-11x at least made some sense to me. 

I think this stock is worth $85 which is around 8x $420mm of EBITDA (I am channeling my Elon Musk here) – a downside of around 27%.

4Q Miss could be a catalyst

Retail gasoline margins get hit when oil prices rise (due to the pass-through lag).  During 4Q19, gasoline prices generally trended up.  This follows MUSA having a blow-out on 3Q19 results where the stock was up +24% in a single day.  Also 1Q is generally their seasonally weakest quarter.  So unlike being short into a 3Q19 print, the chance that MUSA pulls a big beat is quite low. Separately, I would also like to note that the shorts have been blown out the water on MUSA – the number of shares short is sitting at multi-year lows. 

MUSA CEO – he may quit for Speedway Job

Andrew Clyde (56 yrs old) has crushed it at MUSA over the last 6 years.  He has nearly tripled the stock price during his tenure.  The upcoming Speedway spin from MPC needs a strong retail CEO.  If I was picking a CEO for Speedway, Andrew would be my #1 pick.  I have no idea if Andrew is even interested in the job, but if he left it would be a big loss for MUSA as there is no apparent successor.  And Speedway will have about 4x the EBITDA that MUSA has, so they can afford to pay him plenty, cashing him out of whatever MUSA stock he has.  Even if Andrew doesn’t take the job, the Speedway spin is still a net negative for MUSA as it will have to compete for investment dollars… and MUSA isn’t very ESG. 

Tobacco / Vaping – Could be incrementally at risk

A lot has happened here over the last 3-4 months and my gut tells me MUSA is a loser.  Feds just raised minimum age on tobacco to 21 from 18.  FDA is going to ban fruit flavored vapes.  To the extent these collective actions push more sales online, MUSA will lose share.  At a minimum I have to imagine MUSA just lost their 18-20 year tobacco customers. 

So in a nutshell, that’s it -- Valuation + 4Q miss + CEO potentially quits + Tobacco wildcard.  I also wanted to spend a few minutes highlighting some slides from MUSA latest investor slide deck to further support my argument on Valuation and MUSA’s intrinsic value:

http://s22.q4cdn.com/506259022/files/doc_presentations/2019/08/August-Investor-Presentation.pdf

Slide 7 – EBITDA bar chars from 2013 to 2018:

2013 = 337mm

2014 = 446mm

2015 = 343mm

2016 = 400mm

2017 = 406mm

2018 = 412mm

2019 = 416mm (street consensus)

Does this look like a company that is actually growing EBITDA?  I mean for the last 6 years we have had solid growth in vehicles miles traveled yet MUSA can’t sustainably grow EBITDA.  And now we are on the cusp of the massive EV buying cycle where all these new marginal cars will get infinity miles to the gallon.  So I am a bit skeptical they can grow EBITDA in this new EV-phoric world. 

Slide 13 – under 25% of MUSA’s stores have a footprint greater than 1,200 sq feet and about half are simply kiosks… MUSA hasn’t miraculously morphed into Casey’s / Couche Tarde over the last 6 years – despite having spent >1bn in CAPEX

Slide 16 – Capital Allocation Slide

MUSA has been religious on stock buybacks – hats off to them on this.  However, they have spent over 1bn in CAPEX over the past 5 years (and I am not even including 2019 spend).  Where is all the EBITDA growth they have to show for it?  Seriously, where is it? Is the implication here they need to spend $200 million / yr to raise / rebuild old stores and /or open new ones so EBITDA doesn’t decline? 

Slide 20 – Guidance

They stopped guiding to a bunch of items, including EBITDA.  This is old news, but have to wonder why.

Catalyst

1. 4Q Miss after a monster 3Q print

2. Tobacoo weakness 

3. CEO Departure

4. Speedway Spin