A Surprising Way To Profit From Falling Gas Prices

There’s been a lot of talk about gas prices lately. And that’s understandable, of course.

After reaching record highs, benchmark West Texas Intermediate (WTI) crude prices have fallen under $90. Gas prices, meanwhile, have retreated to an average of $3.70 per gallon on Wednesday, according to AAA.

The reason has little to do with more supply or easing geopolitical tensions. In reality, it’s more about demand — i.e., the economy is slowing.

This leads me to something interesting you might not know…

Most people — some Wall Street analysts included — think that gasoline stations profit most when gasoline prices are high. But that isn’t necessarily the case. Gas stations make about the same amount of money on a gallon of gas, whether prices are low or high. The real money maker for gas stations is folks going into the store to get a snack or drink or purchase tobacco.

This is a somewhat recession-resistant business. That’s why I’ve had my eye on a company known as a “low-cost” gas station operator. What’s more, most of its locations happen to be located at the nation’s largest retailer (also known for its low costs).

I’m talking about Murphy USA (NYSE: MUSA).

A Momentum Pick With Recession-Resistant Traits?

Murphy USA was spun off from the Murphy Oil Corporation (NYSE: MUR) on September 3, 2013. Murphy Oil retained all its oil and gas exploration and production assets. Murphy USA took all the gas stations and convenience stores.

At last count, Murphy USA operated 1,695 stores in 27 states. They operate under Murphy USA, Murphy Express, and now QuickCheck — a company they acquired in January 2021, primarily in New Jersey and New York.

Most of the company’s properties are located near Wal-Mart stores, as the company collaborates with the giant retailer to offer customers discounted and free items based on purchases of qualifying fuel and merchandise.

As mentioned earlier, MUSA is well-known as a low-cost gasoline provider. This is especially helpful as fuel prices are still high, and consumers feel pinched overall. If we do indeed slip into a full-blown recession, it should hold up better than the competition.

Remember when I said earlier that gas stations usually make about the same amount of money regardless of the prices?

One caveat of late was the Covid-19 pandemic. You might recall that oil prices briefly fell below zero as the pandemic unfolded and stay-at-home orders were issued. Well, gas stations weren’t exactly giving away gas during this time, so their margins on gas did expand.

For example, MUSA typically has an operating margin of around 3%. In 2020, that margin jumped to 6.4%. It settled back to 4.8% in 2021 and is expected to be around 4.3% this year.

While a few percentage points might not seem like a lot, that bump adds millions into the company’s coffers. To see what I mean, let’s look at 2019 financials…

That year the company had total sales of over $14 billion. Operating income was $423 million. In 2020, it only had sales of $11.3 billion, yet operating income clocked in at $723 million. Less sales, yet it made more money.

Looking at cash flow, you’ll see that in 2019 it generated $313 million. In 2020, cash flow jumped to $564 million; last year, it swelled to $737 million.

For 2022, the company is on track to pull nearly $1 billion in cash flow. That’s huge. These spectacular financials and folks hitting the roads and traveling after being stuck at home provide nice tailwinds for shareholders.

Looking Ahead

As you can see in the chart above, the stock recently hit new 52-week highs. This shows the stock has strong momentum, and that should continue as long as gas prices keep dropping.

Remember, contrary to what most people think, when gas prices are low, it actually benefits gas stations because more people will usually buy things in the convenience store. But if economic conditions erode in a big way and people cut back on traveling, or if gas prices reverse course and begin climbing again, that could put a damper on sales.

If you add it all up, MUSA looks like a solid defensive play with that could have considerable upside.

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