Company Reports

Despite operating in the fragmented fuel retailing industry where competition is omnipresent and barriers to entry minimal, Murphy USA continues to thrive. The firm boasts a low operating cost structure and enjoys a strong real estate position, with most of its 1,700 stores located in high-traffic areas near Walmart supercenters. While the firm’s proximity to a retail stalwart mostly precludes it from offering higher-margin in-store grocery and prepared food like other convenience store peers, we don’t view this as a hindrance to Murphy’s competitive standing. Instead, we think Walmart’s presence mainly neutralizes the in-store appeal for all nearby convenience stores, benefiting the lowest-cost operators. Murphy fits this mold as the retailer’s operating expertise and small-box format help keep store-level operating costs lower than its peers.

We don't plan to change our $420 fair value estimate after narrow-moat Murphy USA delivered strong second-quarter results that were mostly in line with our expectations. The firm's EPS expanded 15% to $6.92 (versus our $6.99 forecast), driven by continued strength in fuel profits. Fuel margin per gallon improved to nearly 32 cents (up from 29.5 cents last year and slightly better than our forecast for about 31 cents), and management reaffirmed its view that fuel profits should prove structurally higher than prepandemic levels as independent convenience stores continue to grapple with higher operating costs. We share in management's sentiment as gasoline demand has mostly flattened in the US and independent operators lack the requisite scale and distribution expertise to build a differentiated assortment of in-store merchandise, thus solidifying their reliance on fuel margins to cover rising operating expenses. In contrast, Murphy's highly efficient small box format and real estate ownership has allowed it to better navigate a rising cost environment as it underprices nearby competitors on gasoline while reaping the benefits of an industrywide uptick in fuel margin. Indeed, we forecast Murphy's per gallon fuel margin to remain in the 30-cent range moving forward, compared with about 16 cents in 2019.

We are initiating coverage on Murphy USA with a $420 fair value estimate and a narrow moat rating. Murphy is poised to benefit from a structurally higher fuel margin environment (currently around 30 cents per gallon) and modest in-store sales growth as the convenience store industry gradually consolidates. Still, we think shares currently look overvalued.

Despite operating in the fragmented fuel retailing industry where competition is omnipresent and barriers to entry minimal, Murphy USA continues to thrive. The firm boasts a low operating cost structure and enjoys a strong real estate position, with most of its 1,700 stores located in high-traffic areas near Walmart supercenters. While the firm’s proximity to a retail stalwart mostly precludes it from offering higher-margin in-store grocery and prepared food like other convenience store peers, we don’t view this as a hindrance to Murphy’s competitive standing. Instead, we think Walmart’s presence mainly neutralizes the in-store appeal for all nearby convenience stores, benefitting the lowest-cost operators. Murphy fits this mold as the retailer’s operating expertise and small box format help keep store-level operating costs lower than its peers.