Goldman Sachs: Murphy USA third-quarter profit beats expectations as fuel supply gains offset weaker retail fuel margins

Why did third-quarter profit beat expectations?

Murphy USA reported third-quarter earnings per share of $9.59, up approximately 32% from adjusted earnings of $7.25 a year earlier. Adjusted EBITDA was $337 million, up approximately 18% year over year. Both exceeded the FactSet consensus estimates of $8.42 and $310 million, respectively.
The key was a total fuel contribution of 37.0 cents per gallon, above Goldman Sachs’ forecast of 34.0 cents but below the second quarter’s 40.6 cents. Fuel supply and renewable fuel credits (RINs) contributed 9.6 cents, well above Goldman Sachs’ forecast of 4.0 cents.

The retail fuel margin was 27.4 cents per gallon, below Goldman Sachs’ forecast of 30.0 cents; the excess contribution from fuel supply and RINs offset the shortfall.
Management broke down the latter’s 9.6 cents into 5.1 cents from uncontrollable activities, 4.3 cents from controllable activities and 0.2 cents from wholesale and terminal operations. The uncontrollable portion reflects price changes encountered when buying and selling inventory during the quarter; Goldman Sachs believes pricing opportunities created by crude oil price volatility boosted the quarter’s contribution.
Management said the total fuel margin in October was in the low to middle range of the 30-plus cents per gallon bracket; over the same period, the industry’s fuel margin for the fourth quarter to date was up 14% from the third quarter. Third-quarter same-store fuel volumes rose just 0.1% year over year, below the Visible Alpha consensus estimate of 1.2%.

Third-quarter same-store merchandise sales rose 0.2% year over year, below the second quarter’s 1.0%. Nicotine merchandise rose 1.5%, while non-nicotine merchandise fell 1.9%; the merchandise gross margin was 20.3%, down 1.2 percentage points year over year.
Merchandise revenue rose 2.9% year over year, but merchandise gross profit fell 2.8% to $234.5 million. Store and other operating expenses rose 11.2% year over year, above Goldman Sachs’ forecast of 8.0%; payment fees resulting from higher retail fuel prices accounted for approximately 75% of the expense increase. Excluding payment fees and rent, same-store operating expenses rose just 0.8%.

Management remains confident in the full-year guidance updated last quarter. The scenario used for modeling assumes a total fuel margin of approximately 35 cents per gallon in the second half, under which full-year net income would be $636 million and adjusted EBITDA approximately $1.25 billion; the actual total fuel margin in the first half was 37.9 cents.
Under that full-year EBITDA scenario, Goldman Sachs estimates approximately $258 million for the fourth quarter, down approximately 11% year over year, versus approximately $992 million combined for the first three quarters, up approximately 36% year over year. The low end of merchandise contribution guidance implies fourth-quarter growth of approximately 2.2% year over year, an improvement from the 2.8% decline in the third quarter.

Goldman Sachs believes the full-year guidance is achievable and the long-term targets are also increasingly likely to be met, with a more balanced risk-reward profile. However, fuel accounts for 77% of the company’s revenue and 54% of its profit, limiting visibility into its earnings growth outlook.
The bank maintained its Neutral rating and $550 target price for 12 months. The report listed a closing price of $515.28 on 28 October.