Casey's General Stores, Inc. CASY is currently trading at a forward 12-month price-to-earnings (P/E) multiple of 26.09X, which positions it at a premium compared with the industry and the S&P 500’s averages of 22.68X and 22.23X, respectively. The stock is also trading above its median P/E level of 25.5X observed over the past year. The valuation suggests that Casey’s is overvalued.
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However, CASY stock has witnessed some correction, given its elevated valuation. Over the past month, shares of CASY have lost 5.1% compared with the industry and S&P 500's declines of 5.3% and 0.8%, respectively.
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Closing yesterday’s trading session at $396.76, shares of Casey’s are currently trading below the 50-day simple moving average of $409.10. The moving average is a key indicator for gauging market trends and momentum. The breach of this threshold heightens investor concerns about the stock’s short-term outlook and signals the potential for further downside if these levels are not reclaimed.
Casey’s Battles Challenges
Casey’s, one of the leading convenience store chains in the United States, is grappling with rising operating expenses, which pose a significant challenge to its profitability. In the second quarter of fiscal 2025, the company experienced a 5.2% increase in operating expenses compared with the previous year, reaching $609.7 million. This rise was largely caused by the operation of 93 additional stores, which contributed approximately 4%. Another 1% of the rise in expenses was due to higher same-store employee expenses, caused by increased labor rates that were only partially offset by reduced labor hours.
This trend is not an isolated occurrence but rather part of a recurring pattern observed in the preceding two quarters, where operating expenses rose 8.7% and 11%, respectively. Such sustained growth in costs could exert pressure on profit margins.
The acquisition of Fikes is expected to increase operating expenses significantly with additional one-time integration costs of $15-$20 million in the third quarter. For fiscal 2025, total operating expenses are expected to grow 11-13%, including $25-$30 million in deal-related costs. Although synergies are anticipated in the long term, the short-term dilutive impact on EBITDA in the third quarter could weigh on investor sentiment.
Due to the financing of the transaction, management now foresees net interest expense to be approximately $90 million for the fiscal year, up from $56 million earlier projected. As a result of one-time deal and integration costs and higher interest expenses, the Fikes acquisition will be dilutive to earnings in the third and fourth quarters.
Casey’s reported a 0.6% decline in same-store fuel gallons sold for the fiscal second quarter, which contrasts with its otherwise decent performance. The company’s fuel margin also contracted to 40.2 cents per gallon, down from 42.3 cents in the previous year. Management foresees same-store fuel gallons sold to be between negative 1% and positive 1% for fiscal 2025.
The prepared food and dispensed beverage segment, a core driver of Casey's profitability, experienced a gross margin decline of 30 basis points year over year to 58.7%. This was primarily due to rising input costs, such as cheese prices, which increased 6% to $2.25 per pound. Such cost pressures, if persistent, could erode margins further, particularly in a highly competitive convenience store market.
How Consensus Estimates Stack Up for Casey’s
CASY is currently in a tough spot. In the past 30 days, the Zacks Consensus Estimate for earnings per share has been revised downward by 67 cents and 43 cents for the current quarter and year, respectively, to $2 and $13.95.
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Casey’s Building Blocks for Future
Casey’s has significantly bolstered its growth trajectory with the recent acquisition of Fikes, marking the largest deal in its history. This strategic acquisition is a key element of Casey’s three-year growth plan and is expected to contribute more than $200 million in inside sales and approximately 200 million gallons of fuel in the second half of fiscal 2025. With the acquisition, Casey’s is well-positioned for further expansion, indicating its commitment to strengthening the company’s market presence through strategic acquisitions.
Casey’s continues to focus on enhancing operational efficiencies as part of its strategic growth plan. The continuous improvement team has been working alongside store operations to eliminate inefficiencies and streamline processes. The results speak for themselves, the company has now recorded its 10th consecutive quarter of reduced same-store labor hours. Through a systematic approach to simplifying operations and cutting unnecessary tasks, Casey’s is paving the way for long-term operational success.
Casey’s continues to solidify its position in the industry, leveraging a resilient business model, strong omnichannel capabilities, expanded customer outreach and exclusive private-label products. In the second quarter of fiscal 2025, the company showcased its strength with a significant increase in inside sales, which grew 9% year over year to $1.47 billion. This impressive growth was driven by strong performance in prepared foods and dispensed beverages, including hot sandwiches and various drink offerings. The grocery and general merchandise segment saw growth in both non-alcoholic and alcoholic beverages, further boosting overall sales.
Looking forward, Casey's has reaffirmed its full-year guidance for fiscal 2025 with expectations for inside same-store sales growth of 3% to 5%. Despite challenges posed by the Fikes acquisition integration, the company expects EBITDA to increase at least 10% for the fiscal year. Furthermore, the company plans to open approximately 270 new stores during the fiscal year. This move will help drive continued revenue growth.
Casey’s maintains a strong liquidity position with $1.25 billion as of Oct. 31, 2024. This solid financial foundation enables the company to pursue strategic initiatives, including acquisitions and manage its capital expenditures. Moreover, Casey’s generated $160 million in free cash flow for the fiscal quarter, up from $145.6 million in the year-ago period. This provides further confidence in the company’s ability to sustain growth.
What’s the Right Investment Strategy for CASY?
Casey’s demonstrates strong growth potential, underpinned by strategic initiatives such as the Fikes acquisition and ongoing efforts to enhance operational efficiencies. While rising costs and integration challenges pose headwinds, the company’s focus on acquisitions and solid sales performance support its long-term outlook. However, CASY’s premium valuation and recent concerns over stock performance warrant a cautious approach, making it prudent for current stakeholders to maintain their positions. Casey’s currently carries a Zacks Rank #3 (Hold).
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