“The market is not fully recognizing SUSS’s valuable stake in SUSP and the earnings power that can be generated in SUSS’s best-in-class retail business,” notes Wells Fargo.
Wells Fargo Securities has introduced its 2014 Integrated Research & Economics Outlook where its analysts have provided their sector forecasts and top investment recommendations for 2014.
Wells Faro’s top picks for 2014 are Philip Morris International (PM), Lorillard (LO), Coca-Cola Company (KO) and Susser Holdings Corp (SUSS).
“In 2014, economic fundamentals will continue to rebalance toward a slightly stronger pace of economic growth. We expect the economy to expand 2.6% in 2014, following 1.9% growth in 2013,” noted John Silvia, Ph.D., chief economist.
Bonnie Herzog, equity senior analyst, noted that the convenience store industry is currently transitioning from “a relative retail backwater industry to one of the most dynamic consumer staples and foodservice retail channels in the U.S.” She added, “We believe the industry is embarking on a new era of sophistication and growth, and savvy, innovative operators will capture more than their fair s hare of industry profit.”
Herzog went on to not that key drivers of the c-store industry growth include favorable demographics, industry consolidation and increased consumer demand for convenience-oriented retail.
“We developed a proprietary convenience store growth drivers framework, in which we analyze (1) unit growth opportunities, (2) SSS opportunities, and (3) margin expansion opportunities, which we believe are some of the key structural factors that should underpin long-term growth and profitability for well-positioned operators,” Herzog noted.
With this criteria, Wells Fargo’s top recommendation was Susser Holdings Corp.
“In our view, Susser is a best-in-class convenience store and foodservice and operator and one of the most compelling growth stories in the c-store industry. With a top-tier foodservice franchise in the Laredo Taco Co. and a concentrated, but underpenetrated, presence in the dynamic and attractive Texas market, we think Susser has some of the best growth prospects in the convenience store industry,” she noted.
The company’s Stripes c-stores and Laredo Taco Co. brand have a stronghold in south Texas, Herzog noted. Wells Fargo expects that management will pursue broader in-state expansion over the next 3-5 years via acquisitions and organic growth. Wells Fargo also pointed to Susser’s management team, led by CEO Sam Susser, noting it is “made up of highly capable operators, who run the business with a long-term perspective and can create significant earnings power that is not reflected in current valuation, in our view.”
In September 2012, Susser spun off its Susser Petroleum Partners wholesale fuel business (SUSP) into an MLP structure (SUSS is the general partner) that provides fuel to SUSS, as well as to third parties. Wells Fargo noted that this business model provides a significant competitive advantage to SUSS, allowing it to take advantage of SUSP’s combined retail and wholesale fuel purchasing volume to obtain attractive pricing and terms while reducing the variability in motor fuel margin.
Wells Fargo also noted that the IPO also lowered SUSS’s cost of capital and created a strategic vehicle for growth and acquisitions. It went on to say that Susser is undervalued in the market today.
“Despite SUSS’s dramatic outperformance in 2013, we believe, based on our sum-of-the-parts analysis, that the market is not fully recognizing SUSS’s valuable stake in SUSP and the earnings power that can be generated in SUSS’s best-in-class retail business. The market is currently implying a value for Susser’s retail operations that is below that of what we believe are inferior operators. Therefore, we believe there is further upside potential to SUSS and recommend that investors build positions in the stock,” Herzog noted.