2013 | 2014 | ||||||
Price: | 33.35 | EPS | $1.94 | $1.63 | |||
Shares Out. (in M): | 76 | P/E | 17.2x | 20.5x | |||
Market Cap (in $M): | 2,535 | P/FCF | NA | 46.3x | |||
Net Debt (in $M): | 724 | EBIT | 263 | 228 | |||
TEV ($): | 3,259 | TEV/EBIT | 12.4x | 14.3x | |||
Borrow Cost: | NA |
Short CST: Breaking Rose-Colored Glasses
CST is a gas station/convenient store business that was spun off from VLO on 5/1/13. CST has traded well and is at ~$33 now. Given the information vacuum and general excitement around spin-offs, CST is highly misunderstood. There’s nearly 40% downside to fair value of $21 once the market appreciates significant downside to earnings and CST’s poor business prospects. In particular, CST should generate 2013 EPS of ~$1.60 (vs Street’s ~$2.25) and deserves below-market multiple of 13x (vs Street’s target of 15-16x) reflecting its worst-in-class assets with negative same-store sales (SSS). CST’s weak FCF potential (44%-85% of EPS depending on growth assumptions) suggests further downside below $21.
Conversations with VLO and CST suggest both management teams are pleasantly surprised by how well CST has been trading. It’s also interesting that recent CST equity awards were not granted through options but through restricted stock.
Company Overview
FY12 Gross Profit Mix |
CST |
Industry Avg |
Public Peer Avg |
CASY |
Couche-Tard |
PTRY |
SUSS |
Fuel |
47% |
33% |
26% |
23% |
26% |
26% |
30% |
Merchandise |
40% |
62% |
71% |
74% |
74% |
74% |
60% |
Other |
13% |
5% |
3% |
3% |
0% |
0% |
9% |
Total |
100% |
100% |
100% |
100% |
100% |
100% |
100% |
Note: SUSS result pro forma for distribution fee to SUSP. CST pro forma for commercial supply agreement. |
|||||||
Industry data per NACS for most recently available year (2011). |
Street’s Perception vs Reality
CST EBITDA Bridge |
Street Low |
Street Mid |
Street High |
Realistic |
2012 PF EBITDA |
$378 |
$378 |
$378 |
$378 |
US fuel margin |
0 |
10 |
19 |
(34) |
US volume / new stores |
16 |
19 |
22 |
5 |
C-store margin improvement |
10 |
13 |
15 |
0 |
2013 PF EBITDA |
$404 |
$420 |
$434 |
$349 |
2013 PF EPS |
$2.12 |
$2.26 |
$2.38 |
$1.63 |
1. US fuel margins
Street |
Realistic |
|||||
Fuel margin (cents / gal) |
2009PF |
2010PF |
2011PF |
2012PF |
2013E |
2013E |
US - VLO reported |
12.6 |
14.0 |
14.4 |
16.2 |
||
Spin adjustment |
(0.2) |
(0.4) |
(0.4) |
(0.4) |
||
Commercial agreement |
(1.5) |
(1.1) |
(1.0) |
(1.1) |
||
US - CST pro forma |
10.9 |
12.6 |
13.1 |
14.7 |
15.7 |
12.9 |
a) False trend - CST’s limited historical data by chance shows rising margins.
b) Rose-colored glasses - Investors eager to chase spin-offs are ready to see the upside and management hasn’t proactively managed expectation.
c) Irrelevant to VLO - Legacy VLO investors don’t focus on retail metrics since it’s more useful to analyze the much bigger and more volatile refining business. Most CST investors aren’t even aware of relevant historical disclosure provided by VLO.
d) Irrelevant to peers - Perhaps most importantly, even veteran retail sell side analysts and investors aren’t well aware of this negative relationship because (i) the relationship is less important to other public comps with small exposure to fuel margins, (ii) the correlation is less pronounced for other c-stores as they typically cut retail fuel price quickly (and do not benefit as much from the lag) in order to drive more traffic towards the c-store business. (CST can’t afford to do the same since fuel is the main business).
2. US organic and new store growth
CAGR |
|||||
Per store per day |
2009 |
2010 |
2011 |
2012 |
'10-'12 |
US fuel volume |
4,983 |
5,086 |
5,059 |
5,083 |
(0.0%) |
US merchandise sales ('000s) |
$3,207 |
$3,333 |
$3,370 |
$3,341 |
0.1% |
Gasoline demand (mmbbls/d) |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
US |
9,284 |
8,988 |
8,995 |
8,990 |
8,752 |
8,703 |
PADD3 |
1,415 |
1,359 |
1,407 |
1,395 |
1,325 |
1,412 |
All |
All |
Legacy |
Legacy |
|
Same Store Info (per store per day) |
1Q12 |
1Q13 |
1Q12 |
1Q13 |
Sites |
991 |
991 |
969 |
969 |
Fuel volume |
5,063 |
5,018 |
4,964 |
4,910 |
Growth |
(0.9%) |
(1.1%) |
||
Merchandise sales |
3,183 |
3,131 |
3,160 |
3,097 |
Growth |
(1.6%) |
(2.0%) |
3. Why CST is different from peers.
4. Merchandise gross margin improvement
Merchandise Sales Mix |
CST |
Peer Avg |
CASY |
Couche-Tard |
PTRY |
SUSS |
Cigarettes |
32% |
29% |
37% |
NA |
32% |
19% |
Foodservice |
9% |
20% |
27% |
NA |
11% |
21% |
Other merchandise |
59% |
51% |
36% |
NA |
58% |
59% |
Total |
100% |
100% |
100% |
100% |
100% |
|
Merchandise gross margin |
29.6% |
35.2% |
40.0% |
33.1% |
33.7% |
33.9% |
Cash SG&A / GP |
65.7% |
72.2% |
68.6% |
72.5% |
74.4% |
73.5% |
5. Poor FCF prospects
No Growth |
3% Growth |
||
2013 PF EBITDA |
349 |
349 |
|
Growth target |
0% |
3% |
|
Incremental EBITDA target |
0 |
10 |
A |
2013 PF gross profit |
1,085 |
1,085 |
|
SSS |
(1.2%) |
(1.2%) |
|
EBITDA loss from negative SSS |
(13) |
(13) |
B |
EBITDA required from new stores |
13 |
23 |
C = A - B |
Assumed EBITDA / CapEx return |
20% |
20% |
D |
Required new store CapEx |
65 |
115 |
E = C / D |
Maintenance CapEx |
75 |
75 |
F |
Total CapEx |
140 |
190 |
G = E + F |
2013 net income |
124 |
124 |
|
D&A |
121 |
121 |
|
CapEx |
(140) |
(190) |
|
2013 FCF |
105 |
55 |
|
FCF per share |
$1.38 |
$0.72 |
Other items
Conclusion / Valuation
Valuation Summary |
Current |
|
Target |
|
Price |
33.35 |
|
21.20 |
|
S/O |
76.0 |
|
76.0 |
|
Market cap |
2,535 |
|
1,611 |
|
Cash |
(330) |
|
(330) |
|
Debt |
1,054 |
|
1,054 |
|
EV |
3,259 |
|
2,335 |
|
Street |
Realistic |
Street |
Realistic |
|
EV / EBITDA |
7.8x |
9.3x |
5.6x |
6.7x |
P / E |
14.8x |
20.4x |
9.4x |
13.0x |
2013 PF EBITDA |
$420 |
$349 |
$420 |
$349 |
2013 PF EPS |
$2.26 |
$1.63 |
$2.26 |
$1.63 |
P&L Summary
Street |
Realistic |
|||||
P&L Summary |
2009PF |
2010PF |
2011PF |
2012PF |
2013E |
2013E |
Motor fuel |
402 |
468 |
517 |
521 |
||
Merchandise |
388 |
412 |
430 |
443 |
||
Other |
128 |
137 |
142 |
139 |
||
Gross profit |
918 |
1,017 |
1,089 |
1,103 |
||
OpEx |
581 |
605 |
636 |
644 |
||
G&A |
72 |
77 |
79 |
81 |
||
EBITDA |
265 |
335 |
374 |
378 |
420 |
349 |
D&A |
101 |
105 |
113 |
115 |
121 |
121 |
EBIT |
164 |
230 |
261 |
263 |
299 |
228 |
Other income (expense) |
1 |
2 |
1 |
1 |
1 |
1 |
Interest expense |
(43) |
(43) |
(43) |
(43) |
(43) |
(43) |
Pretax income |
122 |
189 |
219 |
221 |
257 |
186 |
Income taxes |
41 |
63 |
73 |
74 |
86 |
62 |
Tax rate |
33.3% |
33.3% |
33.3% |
33.3% |
33.3% |
33.3% |
Net income |
82 |
126 |
146 |
148 |
171 |
124 |
EPS |
$1.07 |
$1.66 |
$1.93 |
$1.94 |
$2.26 |
$1.63 |
Shares out |
76 |
76 |
76 |
76 |
76 |
76 |
Subject | RE: question |
Entry | 05/24/2013 04:11 PM |
Member | COTB |
Good question. There's a deferred tax asset of $119m related to step up of tax basis of assets and liabs in Canada. This will allow CST to book higher D&A and report lower income in Canada for tax purposes than GAAP. We don't know for sure how quickly this benefit can be fully realized, but using average PP&E life as a proxy (gross PP&E ex land / depreciation) suggests the duration is about 13 yrs. This suggest NPV of this deferred tax asset (at 10% discount rate) is $65m or 86c per share.
We can incorporate this benefit into a FCF-based valuation framework, but this will likely yield a lower fair value than $21 which is anchored around a P/E multiple. Also note that I'm not hitting FCF for working cap which will likely offset this tax benefit in the likely event that CST is managed to deliver at least some growth (e.g. the 3% growth case). | |
Subject | Debt |
Entry | 05/24/2013 06:13 PM |
Member | nathanj |
I think your Net Debt of $724m is too low. They actually took out $1.05B in new debt after Q1 to give to Valero as part of the spin-off. So net of $70m in cash at end of Q1, net debt is closer to $980m. | |
Subject | RE: Debt |
Entry | 05/24/2013 07:52 PM |
Member | COTB |
Net debt is pro forma for one-time working cap benefit of $260m (see 8-k released on Wednesday). The figure also includes capital lease obligation of $4m to be consistent with industry practice. | |
Subject | Cornerstore-4-Me |
Entry | 05/25/2013 04:03 PM |
Member | Mencken |
Nice work COTB. I’ll repost the comment that I left on the SUSS board, correcting for my complete flub of the WASO (I had been working off the Form 10 drafts which had no sharecount, then forgot to update my placeholder when the final # was determined). Too many people have read Joel’s work and just plunged headfirst into spin-offs with little to no thought. I’ve seen it with OSH and LPR most recently, and CST definitely falls into the same camp. I’m not short yet because I prefer a harder catalyst (nothing against your idea – I just prefer to short against an impending covenant violation, dividend cut, failed M&A, etc. and my small AUM allows me to short <$5/sh stocks in worthwhile size relative to my assets). 2 other random quips: (a) Pretty interesting how they got cagey on the exact dividend $ number outlined in one of the earlier drafts of the Form 10 – I was hoping for them committing to a “too high” # (approximating trailing FCF) which would spell a dividend cut in the future. I’ll keep my eyes on that prospect though. (b) Did you see that the original corporate website name was cornerstore4u.com? Rolls right off the tongue, eh? -------------------- I've spent a bunch of time looking into CST so here are my notes: 1) Company's April 2013 Investor Presentation is a complete work of fiction: - Maintenance CapEx of $40k per store (~$80m / 1,900 stores) appears significantly understated based on comps and the Company's own historical capital intensity - Mgmt plans to spend ~$220m CapEx next year, with $30m of that for IT spending as part of the spin-off. The $190m does *not* include "Strategic Activity" (i.e. M&A), so what's the other 60% of that capex if it's not maintenance? - Historical Average "ROA" (I presume this is Mgmt's term for ROIC) appears designed to specifically mislead investors -- the number doesn't deduct CapEx from the numerator (not even Mgmt's ~$80m "maintenance" CapEx figures); doing so would lower "ROA" to 14% ($240/$1,482), and that's using the fantasy ~$80m maintenance capex figure. - Using $190m as Maintenance CapEx drops "ROA" to 8.8% ($130/$1,482). Let's see... 8.8% is a crummy pre-tax ROA... gas stations are a crummy business... so, yeah, that's probably about right for this Company. 2) CST paid $61m for 29 gas stations in Arkansas immediately prior to the spin-off. Let's see... $2.1m per store 1,900 stores $4,000m Implied EV for CornerStore Where am I going with this? Hmm, let's go to the next module... 3) Current CST Valuation ~$34/sh 76m WASO $2,600m Equity Value $724m Net Debt $3,300m Enterprise Value $130m Normalized Unlevered FCF 25x EV / Unlevered FCF 4% Implied Cap Rate Funny how the implied value from CST's most recent M&A (just 9-months prior to the spin) provides a supportive valuation for the current market price. File this one under, "Things that make you go 'Hmmm....'" 4) Valero clinging to a 20% stake, the Fuel Agreement w/ unspecified price ratchets in future years, the hiring of Valero's General Counsel as CEO (how many lawyers do you know run gas stations?), the rented space at Valero's headquarters, the token annual dividend to satisfy investors living in a ZIRP world [cited number from an earlier draft of the Form 10]... everything about this screams, "Dupe Event-Driven Hedge Funds into paying up for a crummy business on the premise that it's an undervalued spin-off." 5) This is a crummy business. I will buy crummy businesses, but the catch is I will only pay crummy prices. I'd be interested at about 30% of the current market price, or $10/sh. | |
Subject | RE: Cornerstore-4-Me |
Entry | 05/26/2013 07:14 AM |
Member | ffer |
I don't disagree that this is overvalued, but I would note a couple things. The delta in the capex numbers is remodels/new stores...organic capex. I also think their new store economics will be solid...not because they are good operators etc, but because they are opening stores in the EagleFord. It seems pretty hard to screw that up.
COTB, have you done much work on their new store prospects? | |
Subject | RE: RE: Cornerstore-4-Me |
Entry | 05/27/2013 10:44 AM |
Member | COTB |
Thanks for the comments Mencken and ffer.
Mencken - Regarding catalyst, I would point out that the likely miss in 2q13 could be a wake up call for market to realize that eps for the year is tracking closer to $1.60 than $2.25. Note that q2 and q3 are seasonally the strongest quarters of the year (followed by q4, and q1). To hit $2.25, CST needs to do around 85-90c in 2q13 which is unlikely. (There might be some noise from a pro forma standpoint when they report 2q13 which will include one month of data pre spin and two months post spin. So make sure you make appropriate adjustments for public company cost and interest expense on new debt for the full quarters). Some sell side analysts may also initiate on CST and offer a more realistic view of the company, similar to what I have laid out here.
ffer - My post explains why CST will have to spend a significant "organic CapEx" just to keep EBITDA flat or deliver any small growth. The "maintenance" CapEx of $75m is a misnomer. The opportunity in Eagleford isn't as big as generally thought for the following reasons:
1. CST is adding 23 stores which will hardly move the needle vs a baseline of 1,880 stores (many of which are legacy stores with declining SSS).
2. Importantly, for the first time since the recent shale boom the number of oil rigs and the amount of CapEx targeting US shales are no longer growing. E&Ps have become more efficient - producing more output with the same number of rigs and rig crews by reducing drilling time for each well and employing strategies such as "pad drilling".
3. The E&P boom in Eagleford and Texas over the past few years have failed to grow fuel consumption. Texas is doing better than the US overall but still there's no growth. With lower future growth in CapEx (and related employment of rig crews), Texas may soon join the rest of the country in seeing declines in fuel demand.
4. In any case, I have assumed a 20% EBITDA return on new store CapEx. Susser (100% Texas with a proven QSR concept and more mature stores) is getting 23-25%. So I think 20% for CST is likely generous. | |
Subject | RE: RE: Some questions |
Entry | 05/27/2013 11:10 PM |
Member | COTB |
Hi JetsFan and everdeen - thanks comments and questions. I was approaching this from a long side originally, so I do appreicate where you're coming from. Below are my responses.
US fuel margins (JetsFan questions 3 and 4)
- I'm not sure if I should explain the concept of statistical significance and p-value. Please skip if you know this. Basically it's an objective way to measure whether there's likely an underlying relationship between multiple datasets. Imagine a world with two types of basketball players - the good type which always make a free throw, and the bad which makes it only 50% of the time. If a basketball player makes two free throws in a row, you may not readily conclude he's a good shooter (a "bad" shooter still has 25% chance of such a fluke correspondig to a p-value of 0.25). But if he makes say 6 in a row, you would probably conclude he's a good shooter (because such a fluke has only 1.56% probability or a p-value of 0.0156). A lower p-value indicates greater statistical significance and a universally accepted threshold is 0.05. This is the same threshold the FDA uses to evaluate drugs in clinical trials. You ofen see pharma/biotech brags when they have a very low p-value. Conversely, high p-values suggest the seeming relationship may just be fluke. A p-value of 0.5 would be equivanlent to seeing just one successful free throw and conclude that the person is a good player.
- If fuel margins were indeed a percentage of fuel price like you suggest, we should see low p-values from regressions between fuel prices and margins. A regression based on the data in the past 10 years yield a p-value of 0.31214, 0.42622, 0.65361, and 0.62408 respectively for Q1 to Q4. The results are abysmal.
- If fuel margins were indeed a percentage of fuel price like you suggest, we should see low p-values from regressions between fuel prices and margins. A regression based on the data in the past 10 years yield a p-value of 0.31214, 0.42622, 0.65361, and 0.62408 respectively for Q1 to Q4. The results are abysmal.
- In contrast, the relationship I indicated produces p-values of 0.04293, 0.00069, 0.00135, 0.000009. All highly statistically significant.
- My thesis wasn't based on just one data point in 2Q12 like you suggested. It's based on 10 years and 40 quarterly data points of data. Hopefully the sports analogy above resonates with a Jets fan, but If you still don't understand, ask VLO, SUSS, ATD for their views.
Secular decline (JetsFan questions 5 and 7) - My post shows that despite significant economic rebound from 2009 to 2012, fuel demand fell in the US and was flat in PADD3. This contradicts with your view that higher GDP would result in greater fuel demand. The answer lies in the CAFE.
- The fuel economy standard for passenger vehicles has had NO change from 1990 to 2010 at 27.5 mpg (per NHTSA). GW Bush initiated an increase (effective after his term) and Obama followed through such that the mandated standard rose to 33.3 in 2012 and is set to rise further to 34.2 in 2013 and further to 38.5 in 2016 and 46.5 in 2021. Note that these are final rules which would improve average fuel economy for the entire new car fleet in 2021 similar to a current Prius (50 mpg). Prososed rules contemplate a futher increase to 56.0mpg in 2025. The rising CAFE standards explain why the rear view mirror may not provide an accurate picture of the road ahead.
- With fewer trips to the gas stations, merchandise sales should be impacted as well. As one would expect, historical data shows some correlation between fuel volume and merchandise sales.
C-store ownership (JetsFan question 6)
- Not sure if I understand your comment. Conventional retail wisdom would suggets a dollar of earnings from a royalty income from franchisees deserve a higher multiple than the same dollar generated from owned stores.
Acquisition risk (JetsFan question 8).
- I'm not worried at all especially at valuation anywhere near here. ATD bought SFR NO at below 6x EBITDA and its failed bid for CASY was also under 6x. ATD has been very disclined and will only do deals under 7x. CST is trading at 9.3x on my '13 EBITDA (which I believe is right as opposed to "Street" EBITDA). On the last call ATD also said it will only deals up to $1.5b, less than half of currrent CST EV.
- Again, you should ask ATD for their views of CST current valuation and asset quality.
Asset quality / valuation (JetsFan questions 1, 2)
- Not only does CST have worse gross profit mix than public peers, its mix is also worse than industry average per NACS (which includes a large share of single mom-and-pop stores).
- Please re-read my post on why ATD uniquely trades a premium EBITDA multiple.
- CST's after-tax unlevered return of 11.3% (pretax EBIT return of 17%) may be interesting if we can buy it near book value. I don't see how buying it when EV is 2.3x of IC is attractive. Basic corporate finance woud suggest EV/IC = ROIC/WACC. Assuming an 8% WACC suggests a fair EV of ~$2.0b, well below current value of over $3b.
Canada (JetsFan question 1)
- My thesis does NOT embed any volatility discount for the Canadian fuel business. Nor does it assume that Canadian margins in 2012 were inflated. But I do believe Canada is not growing and is inferior to the merchandise business of public peers which show some growth.
Store size (JetsFan question 9)
- The stores obviously vary in sizes. I pointed out the opportunity to roll out foodservice in larger/NTI stores, but these represent only 4% of total c-stores. The average does matter and it's hard to make the math work when the average is well below peers.
| |
Subject | RE: RE: RE: Some questions |
Entry | 05/27/2013 11:16 PM |
Member | COTB |
Sorry for a few minor typos below... | |
Subject | RE: RE: RE: RE: RE: Some questions |
Entry | 05/28/2013 08:46 AM |
Member | COTB |
I hate to go over Stats more than I already have, but find a book on regression with dummy variables to capture the impact of seasonality. To put it mildly overlooking the obvious seasonality in the business wouldn't make a lot of sense.
I gather that you're not convinced despite seeing very low p-values but somehow convinced seeing very high p-values. Short of an actual future result, I'm not sure what is needed to convince you one way or another. | |
Subject | RE: RE: RE: RE: RE: Some questions |
Entry | 05/28/2013 09:00 AM |
Member | COTB |
CST comps have shown small positive growth in fuel volume. The PADD3 pie is not growing (should soon shrink) but within the mix there are share gainers and share losers. US overall is declining but again if you're a good operator and can afford to use low fuel price as a leader then you can comp positiive. | |
Subject | Updated thoughts? |
Entry | 08/13/2013 11:06 AM |
Member | archer610 |
Any updated thoughts here? |