Don't Be Hasty To Dump Casey's, Deutsche Bank Says Long-Term Outlook Still Positive

Deutsche Bank's Shane Higgins maintains a Buy rating on Casey's stock with an unchanged $120 price target as the analyst's longer-term bullish outlook remains unchanged.

Q4 Positives

The convenience store chain's earnings report contained nine notable positive aspects, including:

1. Gasoline comps and grocery comps on a two- and three-year stack showed signs of stability.
2. Gallon comp fell just 0.5 percent versus the analyst's expectations of a 1.0 percent decline.
3. Fuel gallons rose 3.0 percent, which exceeded the analyst's expectations of a 2.7 percent gain.
4. Fuel gross profit of $85.6 million came in better than the $84.1 million expected.
5. Grocery comp of 1.5 percent was 0.5 percentage points better than expected.
6. Prepared Food comp of 3.2 percent exceeded expectations for 2.5 percent growth.
7. Prepared Food gross profit of $143.8 million was roughly in-line with expectations.
8. The company bought back $49.4 million worth of its own stock in the quarter and still has $250 million remaining in its buyback program.
9. Casey's successfully locked in favorable cheese costs through the end of 2017.

Q4 Negatives

On the other hand, the following four aspects of the report are concerning:

1. In-store gross profit only rose 3.7 percent year over year, which marks a continued deceleration and fell short of the company's expense growth of 11.4 percent.
2. Management's fuel margin outlook of 18.0 to 20.0 cents for fiscal 2018 appears to be optimistic.
3. Grocery margins fell 103 basis points while the analyst was expecting a flat reading.
4. Prepared Food gross margins fell 20 basis points while the analyst was expecting a flat reading.

The Bottom Line

Bottom line, the analyst is optimistic Casey's can deliver EBITDA growth later in fiscal 2018 as grocery inflation is expected to return.

At last check, shares of Casey's General Store were down 8.26 percent at $106.88.