Casey’s General Stores (CASY): a comment on sell-side securities analysis


I was flipping through the pages of Value Line (I’m an on-and-off subscriber) a few months ago, looking for dividend stocks when I happened to come across Casey’s General Stores (CASY).  It wasn’t what I was looking for, but it seemed interesting.  So I bought some and began to study the company.

There’s a lot to like about Casey’s, even though the dividend yield on CASY is only about 1%.  The company operates convenience stores and gas stations in (very) small towns in the Midwest.  It looks to me like the company can probably grow by about 15% a year, through a combination of building new outlets, adding new c-store services and buying the businesses of smaller, less efficient competitors.  On my short acquaintance, management seems highly competent.  Extra motivation to perform may come from a failed hostile takeover attempt two years ago by Canadian Couche-Tard.

The only fly in the ointment is that at yesterday’s closing quote the stock seems a little pricey.      …which brings me to the point of this post–the recently reported April quarter earnings (4Q11 of CASY’s accounting year).

4Q11 results

Before the open on Wall Street the morning of June 13th, CASY reported 4Q1 earnings.  It posted eps $.61 a share, up a penny from results in the comparable quarter of fiscal 2010.

The stock fell 13% on the news.

Why the sharp decline?

The company is followed by six or seven professional securities analysts who publish estimates of CASY’s earnings and sell information about the company to (mostly) institutional clients.  Their consensus was that CASY would earn $.66 a share in the quarter.  So $.61 was a disappointment, or an earnings “miss.”

Look at the quarter a little more closely, though.  Remember, too, that I’m not an expert on CASY; I’ve just begun to get to know it.  The second half of the fiscal year is not usually a strong period for CASY.  That makes some intuitive sense, since the driving season is over.  In fiscal 2008 and 2009, CASY earned $.42 and $.43 a share in 4Q.  The $.60 a share CASY earned in 4Q10 was a highly unusual 40% year on year jump.

It turns out that, because of gasoline prices that were both very high and very volatile during 4Q10, CASY achieved the highest unit profit on gas sales (close to $.16 a gallon) it had ever made in a 4Q.  Adjusting that back to a more normal $.14/gallon profit would have reduced eps to $.48 or so.  In other words, what appeared on the surface to be an innocuous projection by professional analysts of 10% year on year eps growth for CASY in 4Q11 was actually a close-to-preposterous estimate of a 38% advance.

Having done earnings estimates myself, having supervised groups of analysts and having used estimates generated by others over thirty years, what this says to me is that no one did any actual analysis of the accounting statements.  These analysts just pencilled in a number that looked plausible on the surface.

What’s just as telling is that the stock market didn’t see through this shoddy work and reacted violently to the downside when the actual earnings figures were announced.

why this example is important

I think it illustrates that high-quality information about companies is flowing much more slowly in the post-Great Recession world than it did before.  That means that ordinary investors like you and me have a better chance of developing information that the market doesn’t already know.

Two weeks after the earnings report, CASY is back above $59–where it was trading before the 4Q11 earnings release.

1Q11 and 2Q11 were also periods of unusually high gasoline profits.  It will be interesting to see if the reports of CASY’s July and October quarters create similar chances to buy the stock at favorable prices.




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