February 16, 2017 | 3:04 PM by Jay Kunstman | jkunstman@jaguaranalytics.com

Murphy USA (MUSA) – The Wal-Mart Effect

An independent retailer of gasoline products and convenience merchandise, Murphy USA, which was spun out from Murphy Oil (MUR) in 2013, operates through a network of ~1,400 gas stations in 26 states (primarily concentrated in the Southern and Midwestern United States). The company generates margin from retail fuel and merchandise sales while using a high-volume, low-price operating strategy that caters to price-conscious customers. Per J.P. Morgan, here is how their revenues are broken down as well as where they are primarily located within the United States:

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Merchandise – Murphy USA’s convenience offering centers on the “smokes and cokes” model, as opposed to the full-service food offering trend that many c-store peers pursue. Murphy carries tobacco products, snacks, beverages, and non-food merchandise. It should be noted that in 2015, Murphy USA purchased >85% of merchandise from McLane, a wholly-owned subsidiary of Berkshire Hathaway (BRK/B). In late 2015, MUSA signed a new supply agreement with Core-Mark (CORE) for five years beginning in January 2016. Core-Mark will deliver >75% of merchandise during the term of this agreement.

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Fuel Supply – Murphy USA purchases product in bulk directly from supply hubs and refiners. Using its logistics capabilities, MUSA delivers the product across its network and also sells into local wholesale markets. Firm access to terminals and pipelines secures logistics availability and allows MUSA to blend its own fuel to capture Renewable Identification Numbers, or RINs. Below, you will find an illustrative arbitrage example from a recent J.P. Morgan note:

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Refresh Program

Murphy USA sites are standardized 208 or 1,200 square foot kiosks. The formats also require only 1-2 employees at a time, and most operate on company-owned real estate. Over the last 3-4 years, MUSA honed in on a 3,500 square foot offering that it successfully rolled out in multiple markets. In    2015, MUSA completed its first raze-rebuild, which replaces kiosks with 1,200 sq ft stores along with more fuel dispensers. Candidates for the program have higher than-average traffic and fuel margins, meaningful uplift potential in merchandise and the ability to increase fuel traffic due to expanded product offerings. In 2016 MUSA built 68 new stores and is planning 50 per year from 2017-19. Refresh economics generate a 3-year payback with typical costs of $30k that drive an identifiable 1% uplift in fuel/merchandise sales and lower maintenance expense.

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Wal-Mart (WMT)

In 1996, Murphy Oil began its relationship with Wal-Mart (WMT). The two companies grew Walmart’s fuel offering over time –with Murphy purchasing small parcels of real estate from Walmart and developing the Murphy USA gas station offering at Supercenters. Those Murphy USA sites participate in Walmart discounting and credit card programs. The most recent agreement, signed in December 2012, allows Murphy USA to purchase the land and to develop an additional ~200 locations at Supercenters across Walmart’s core Southeast, Southwest and Midwest regions. MUSA expects to place the remaining ~8 stores from that agreement into service during 2017.

However, it should be noted that on January 25th, 2016, it was announced that Wal-Mart opted not to proceed with MUSA’s offer to partner in building out a fuel offering at remaining Supercenter locations, choosing to undertake the investment themselves. In response, Murphy USA launched its Plan B independent growth plans in which it will complete the current ~200 store authorization from 2012 (8 final stores in 2017). Otherwise, growth will focus on growing Murphy Express near, but not on, Supercenter locations. Murphy USA locations will continue to accept Wal-Mart payment cards.

As J.P. Morgan mentions, “As opposed to a diversified portfolio of sites granted by Wal-Mart to Murphy USA for development of US locations, now Murphy USA possesses no limitations with respect to Express locations. Murphy USA can cherry-pick stores targeting the best returns with lower market and execution risk.”

For what it’s worth, back on June 9th, Jefferies analyst Christopher Mandeville added Murphy USA to the firm’s Franchise Pick list. In that research note, Mr. Mandeville said traffic patterns at Wal-Mart (WMT) are encouraging. He points out his analysis shows an 86% correlation between Murphy merchandise sales and Wal-Mart’s traffic.

Insider Buying

Taking a look at the Insider Tab within the Jaguar Pro Trader Tools feature, we can see that there have been some significant buyers of the stock this month.

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Analyst Coverage

There is a very small amount of sell-side coverage on this name. Currently, there are 3 Buy Ratings and 1 Hold Rating with a consensus price target of $83. Over the last several months, here is some commentary from certain analysts:

Stephens – On November 17th, analyst Ben Bienvenu upgraded Murphy USA to Overweight from Equal Weight as he believes the weakness in shares over the last two months has presented a “great buying opportunity.” The analyst expects core operating performance to improve going forward and says Murphy USA has a “significant” competitive advantage in the market place given its flexible fuel supply, a defensive operating model and a “very strong” management team that is committed to creating shareholder value. He also raised his price target on shares to $82 from $75.

Jefferies – On November 16th, analyst Christopher Mandeville viewed the 10% selloff in shares of Murphy USA following the U.S. election results as overdone. There are fears of a material change to the renewable fuel standard mandate and potential ramifications for Murphy’s earnings, Mandeville told investors in a research note. He believes the company’s fundamental outlook is “solid” and is a buyer of the stock at current levels. He keeps a Buy rating on Murphy USA with an $85 price target.

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#BRK.B#CORE#MUSA#WMT

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