Valero Energy Corp. (VLO.N) spun off CST Brands (CST.N) in 2013, which led to the creation of the second largest publicly-traded fuel and convenience retailer in North America. Gasoline and groceries is a very competitive sector with notable players such as Casey’s General Stores Inc. (CASY.O) and Seven and I Holdings Co Ltd. (3382.T), which operates the 7-Eleven brand. So is CST Brands keeping up as it stocks the milk and bread?
Analysts have been raising estimates for CST Brands and based on the positive StarMine Predicted Surprise of 9%, it looks like they may not have raised them enough. Look for this company to beat estimates when it reports quarterly results on Feb. 27.
Source: Eikon/StarMine
Fill ‘er up
An encouraging sign for this retailer is its strong cash flow from operations (CFFO). This key indicator has topped the $100 million mark for the second consecutive quarter and exceeds the net income. That’s a good sign for future earnings. CST Brands recently acquired Lehigh Gas GP LLC, looking to expand its footprint. Strong cash flow is one reason the company can go ahead and make investments such as this, looking toward future earnings.
Source: Eikon/StarMine
Pumping up margins
Another reason the purchase makes sense is CST’s improving margins. As you can see, gross margins have been increasing over the past eight quarters, reaching a high of 11% in the most recent quarter. CST is also seeing improved operating profit margins which are at a two year high of 3.3%. While that is still below the industry median, the improving margins come at a time when the rest of the industry has seen margins fall. Analysts seem to have taken note.
Source: Eikon/StarMine
High octane
As you can see in the chart above, the I/B/E/S consensus estimate has been rising over the past 90 days and is currently at 73 cents per share. Throughout this period, the StarMine SmartEstimate has been higher than the consensus and remains higher at 80 cents per share, indicating that the latest and the best analysts are above the consensus. In fact, there is even a Bold Estimate of 90 cents. This estimate is by a 5-star rated analyst (the highest possible rating) who has a track history of being accurate. That strengthens our belief that the company will beat estimates.
Finally, CST Brands benefits from falling crude oil prices, as it buys wholesale and sells retail, and with crude oil prices hovering around the $50 mark, look for the company’s margins to improve further. Although acquisitions can lead to synergies, in order to unlock them, there needs to be strong focus on integration.
On the last earnings call, CEO Kim Lubel said that “the dedicated integration team will be focused on making each transition as seamless as possible.” That shows that management understands the challenges with these acquisitions and is making the right moves. Looks like CST Brands might be ready to gas up and go.
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