Murphy USA Positioned for Greater Profitability

EL DORADO, Ark. — Murphy USA Inc. (MUSA) should see a "substantial lift in its profitability" as it shifts from 208-square-foot kiosk locations to 1,200-square-foot convenience stores, according to a new report penned by Bonnie Herzog, managing director of beverages, tobacco and convenience store research at Wells Fargo Securities LLC.

Herzog reasons that MUSA's kiosk locations are geared toward "low-margin tobacco," which provides margins of 13.5 percent. By lowering its mix from 80 percent of its sites comprised of kiosk locations to 60 percent, the retailer can dramatically step up merchandise initiatives to drive margin expansion.

MUSA has several differentiating aspects that set it apart, added Herzog, including:

• An advantaged fuel supply;
• A strong network of stores, the majority of which it owns, near Walmart locations;
• A long runway of opportunities given its symbiotic relationship with Walmart; and
• Attractive store returns that exceed peer averages.

"We believe MUSA has the right strategy in place to leverage its robust customer traffic, strong unit growth trajectory, advantaged fuel supply and higher margin non-tobacco merchandise sales growth to deliver solid results over time," Herzog wrote in her report released Monday.

The Wells Fargo managing director gave MUSA's stock a "market perform" rating because she feels many of MUSA's differentiating factors are already reflected in its current stock price. However, based upon one relative valuation analysis, Wells Fargo concluded that MUSA's stock trades "at a discount to peers Casey's General Stores Inc., CST Brands Inc. and Alimentation Couche-Tard Inc.

To make MUSA's stock even more attractive, Herzog said she is looking for the following things:

• A more compelling entry point;
• A longer track record of operating larger format stores;
• A new agreement with Walmart for future store builds; and
• Stepped-up raze and rebuilds.

El Dorado-based Murphy USA Inc. operated 1,271 convenience stores as of March 31.