Murphy USA Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Murphy USA Inc. is a leading retailer of gasoline and convenience products, operating a network of stores primarily in the Southeast and Southwest United States, with a focus on fuel sales as its primary revenue driver.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Murphy USA (MUSA) operates primarily in the retail fuel and convenience store sector. It’s not a high-growth business in itself. Instead, they’re focused on a high-throughput, low-cost model. Their locations are typically near Walmart stores, which offer high visibility and traffic. Here’s a breakdown:

  • Revenues: MUSA’s revenue is heavily reliant on petroleum product sales, with merchandise sales as a secondary contributor. Revenue from petroleum sales accounts for more than 80% of total revenue. This is followed by sales of tobacco, snacks, and beverages in the merchandise segment. A significant portion of their petroleum sales is through fuel supply agreements with major oil companies.
  • Margins: The gasoline retail business has notoriously thin margins. Murphy’s net income fluctuates with changes in fuel prices but they have a good record of maintaining strong operating margins. For the recent quarter, the fuel gross margin has increased, while the merchandise margins have stayed roughly in line with the past year.
  • The ability to maintain fuel margins during volatile commodity prices is a hallmark of well-run operations.
  • Competitive Landscape: The company competes with other retail gas stations and convenience stores. Competition is intense in the industry as a whole because they tend to be located at high-traffic sites.
  • Given that fuel sales are a commodity, differentiation through other means is a competitive advantage.
  • What Makes MUSA Different: MUSA differentiates itself by its focus on high-throughput locations and low operating costs. The company’s operational philosophy is to create lean and efficient operations at high-traffic locations close to the Walmart business, which generates more frequent business than other competitors. Also they have great fuel sourcing strategies that allow them to achieve high margins. They do not use promotional prices very much, instead they tend to focus on a more value based product and experience, so they do not attract as much lower price customers. MUSA has also started to focus on a more consistent store and service strategy over the last 2 years as they expand their network. This is particularly relevant to their efforts at brand building.

Recent Developments and Management Perspective: Recent earnings calls and SEC filings indicate the following information:

  • Strong Performance: MUSA has been performing well, exceeding analysts’ expectations in their operating margins. This has been partly driven by higher fuel margins.
  • Growth: The company has been growing its network through the opening of new stores in the pipeline. The company has made a few strategic changes to expand its business operations. They have also moved to expand their new brand and products.
  • Focus on core business: MUSA management has maintained its core focus in the company and its ability to drive high revenues and profitability in a challenging market. They want to keep optimizing their supply and operations to get better performance. Management does recognize the strong demand for lower price fuel with high quality and convenience.

Legitimate Risks:

  • Volatility in Fuel Prices: Being heavily reliant on petroleum sales, MUSA is highly susceptible to fluctuating fuel prices, which can materially impact its net income as well as consumer spending on its secondary revenue streams.
  • This is often the greatest risk to the company’s short and mid-term earnings and cashflows.
  • The company’s fuel supply agreements helps a little bit but does not insulate it fully.
  • Competition: The gasoline market is extremely competitive, with small fluctuations in pricing power potentially driving away customers. It is very easy for customers to drive to a nearby alternative location.
  • They have also a strong competitor in the market in QuikTrip that is now expanding further.
  • Dependence on Walmart Locations: A considerable portion of MUSA’s business stems from its location near Walmart stores. Any disruption in this relationship or decline in traffic at those locations could harm MUSA’s sales.
  • Regulatory Pressures: MUSA must adhere to all regulations, which are often complex, and they are also subject to any change in existing regulations, both which can lead to increased cost of operations. Also, they have seen instances of litigation.
  • There is risk that new regulations for emissions or fuel content may have negative impacts to MUSA’s revenues and profitability.
  • Supply Chain Disruptions: MUSA’s operating results could suffer due to issues at various points along the supply chain of petroleum products, especially given the current volatility in the market. This could lead to less fuel for sale as well as higher prices.

Business Resilience: MUSA has shown some good financial stability and is reasonably well-managed company, and has shown the ability to generate value and returns for investors. It’s main advantages are: * Strong Locations: A great percentage of its business stems from its high-traffic, high-visibility locations near Walmart supercenters. * Scalable Low-Cost Operations: MUSA’s business model relies heavily on minimizing costs. * Strategic sourcing agreements: The company has entered into agreements with major producers, which is designed to keep prices down.

  • Good Margins: The company’s focus on having a high fuel margin and a strong product mix makes the business model very resilient.

Financial Analysis:

  • Balance Sheet: MUSA’s balance sheet is reasonably healthy with a comfortable liquidity position, high amount of cash on hand, and a manageable debt-to-equity ratio, which is at 1.7.
  • Their inventory is very manageable and does not fluctuate much.
  • Income Statement: MUSA has shown strong revenue growth in its core marketing segment and in overall sales. Although the company is primarily a fuel business, it also sells merchandise, and is expanding in that direction. It has high operational margins for a retail fuel business and those have increased recently. These increased earnings are a source of resilience for investors.
  • Cash Flow: The company has a strong operating cash flow which is used to finance the company and its operations. They have also made some shareholder friendly measures recently that have made the investment more attractive for investors.

Understandability: 2 / 5

  • MUSA’s business model is straightforward at a surface level: a gas station and convenience store chain. However, the underlying dynamics that influence financial results-such as fuel pricing, commodity markets, and different business units within the organization-are very complex. Additionally, the company is often trying to optimize pricing and supply chains in ways that are not readily available in disclosures, so you must rely on your interpretation of the news and financial statements. This complexity reduces understandability to a degree.

Balance Sheet Health: 4 / 5

  • MUSA has a solid balance sheet with high cash, low levels of short-term debt, and moderate long-term debt. It has good debt management with a plan to reduce its leverage. MUSA’s financial position is relatively stable, and the company has the financial stability to sustain operations over the near term, even in times of severe market pressure.

Conclusion:

  • MUSA is a well-run company that, due to its focus on operational efficiency and strategic location, should continue to post impressive earnings. However, the company’s main business depends on the oil and gas market, which can fluctuate heavily and be a potential risk. Also, the company may struggle to develop a wide-moat business because it sells commodity products, but its distribution network gives it some edge over its peers.
  • Management is taking the right steps to improve the business by focusing on brand building and increasing its product mix. But how long that will take to meaningfully alter the underlying business is unknown. * You need to keep track of the changes of the industry for the company’s valuation.