Wells Fargo Downgrades Convenience Stores, Murphy USA Is Top Pick

Wells Fargo has downgraded convenience store sector to Market Weight ahead of the quarterly prints from the companies such as Murphy USA Inc MUSA, which remains the brokerage's Top Pick in the sector.

The brokerage sees headwinds for the sector from modest fuel prices, and soft in-store sales due to weather, elections and higher gas prices. Also, the sector would feel the pinch from falling RIN (renewable identification number) credit prices and rising wages.

However, analyst Bonnie Herzog is upbeat on Murphy USA as it is better positioned near term. Murphy USA is expected to report its results on February 2.

And Others

In addition, the downside risk from RIN to Casey's General Stores Inc CASY’s EPS (-11 percent) would be greater than to Murphy USA’s EPS (-8 percent).

“MUSA has disproportionately benefitted from elevated RIN prices, however given the interplay between its Product Supply & Wholesale (PS&W) division and RIN sales, the net impact of losing RIN sales is somewhat neutralized,” Herzog wrote in a note.

Herzog also cut third quarter EPS estimate of Casey’s by $0.19 to $0.72 on lower Grocery & Merchandise comps. The analyst believes Casey’s could see margin pressure in Prepared Foods given the rise in coffee/commodity prices. Casey’s is estimated to announce its quarterly results between March 6 and 10.

Herzog is also cautious on CST Brands Inc CST, despite the company’s strong retail business, as he believes the pending deal with Couche-Tard to limit further upside. CST Brands will announce its financial results on February 27.

At last check, shares of:

• Casey’s fell 1.16 percent to $113.57. The analyst has a valuation range of $114–$116.
• CST were down 0.04 percent to $48.16. Herzog’s valuation range stands at $48–$50.
• Murphy USA slipped 0.58 percent to $63.33, while the analyst’s valuation range is at $70–$72.