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Player Avatar stockshakers93 (59.15) Submitted: 7/19/2011 12:31:46 AM : Outperform Start Price: $45.92 CASY Score: +5.27

Have you ever heard of Ankeny, Iowa; Bluesprings, Mo.; Basehor, Kan.; St. Francis, Minn.: Godfrey, Ill.; Yanktown, S.D.; Wood River, Neb.; or Argos, Ind.? Well, these are some of the typical leafy small towns that dot the landscape of America’s Midwest, where CASEY’S (CASY-$43.43) operates 1,610 bright, clean and colorful convenience stores. Last year, these little gold mines sold $6.7 billion worth of gasoline, diesel fuel, OTC pharmaceuticals, milk, breads, beverages, housewares, pet supplies, automotive products, beer, wine, hamburgers, health and beauty aids, pastries, soups, soaps, pizza and donuts. And while we recognize Pizza Hut or Dunkin’ Donuts as the industry leaders, CASEY’S is the 9th largest retailer of pizza and donuts in the U.S.

The convenience store business is tough — like fighing bobcats for a living. Most operators earn onionskin thin margins and low single-digit returns on invested capital. About 65 percent of store revenues flow from the fuel pump, and the consumer is so price conscious that there’s little room for price flexibility. And considering the high level of fixed costs for labor and rent and the volatility of fuel prices, this is not the easy Mom and Pop business of a generation ago.

But CASEY’S is successful for the following reasons: 1) Lots of fresh food products, 2) Enormous economies of scale, 3) A location strategy where 1,200 stores are located in towns of fewer than 5,000 residents and are often the only game in town, 4) Its operations are completely integrated, 5) CASEY’S owns all its stores and distribution centers, 6) It owns all of its trucks and delivers 77 percent of its own gasoline, and 7) CASEY’S fresh food division generates gross margins of 62 percent. These benefits give CASEY’S a significant advantage over the competition in a very fragmented industry.

In the past 10 years, CASEY’S store count has grown from 1,305 to 1,610; its book value has doubled to $12.75; revenues have grown more than three-fold to $6.7 billion; and dividends have increased seven-fold to 54 cents as net-profit margins improved by 50 percent to an impressive 2.1 percent. There are only 38 million shares outstanding, and since 2001, CASEY’S share price has risen from $15 to $45 earlier this year. This year, CASEY’S earnings are expected to rise by 18 percent to $3.00, and 2012 earnings are projected at $3.55. As the store count grows to 1,725 in 2015, earnings could reach $5.00 a share on revenues of $9 billion.

CASEY’S is a clean company with a fine balance sheet, a good income statement and honest management. CASEY’S doesn’t pollute the environment and enjoys good relations with its 8,100 employees. CASY is a good neighbor, pays its state and county taxes on time, and gladly supports the community activities of the hundreds of little towns in which it does business. CASEY’S has a strong economic moat, almost no competition, solid management, a captive audience and employees are not unionized. The company has a great balance sheet, superb inventory controls, strong cash flow and good marketing people. So, I think the stock, in the next 10 to a dozen years, could trade at the $95 to $110 level providing CASY is not bought out by a competitor sooner. This little-known classy stock looks good in any conservative long-term growth portfolio.

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