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Here's Why Murphy USA (MUSA) is a Compelling Energy Pick

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Leading independent retailer of motor fuel and convenience merchandise in the United States, Murphy USA (MUSA - Free Report) has been impressive over the past year. The company also has strong earnings trends to back up its performance.

This El Dorado, AR-based company, in its current form, came into existence following the 2013 spin-off of Murphy Oil Corporation’s downstream business into a separate, independent and publicly-traded entity. Murphy USA markets refined products through a chain of retail stations, almost all of which are located near a Walmart supercenter, primarily in the Southeast, Southwest and Midwest United States.

Let’s discuss the reasons that make Murphy USA an attractive pick:

Macro Tailwinds

Even as fears revolving around high inflation and slowing growth somewhat cloud the outlook for Oil/Energy, it has remained the best S&P 500 sector over the past year. The space has generated a total return of around 9.4% in the past 12 months compared with the S&P 500’s loss of 9.1%. Apart from a relatively constructive fundamental picture, the sector is enjoying support from geopolitical uncertainty amid Russia’s military operations in Ukraine. In March 2022, crude prices surged to multi-year highs of $130 on concerns about supplies from Russia, which is one of the world's largest producers of the commodity.

Agreed, oil has pulled back from those lofty levels, However, the commodity still has enough reasons to stay elevated in the near-to-medium term, with the conflict showing no signs of a quick resolution, the risk of dwindling inventory and the influential oil exporters’ group OPEC sticking to a conservative production profile.

Solid Rank and VGM Score

Murphy USA is a Zacks Rank #2 (Buy) stock in the Zacks Oil and Gas - Refining & Marketing industry, which carries a Zacks Industry Rank #17. Its industry rank places it in the top 7% of around 250 Zacks industries. In addition to the favorable rank, MUSA enjoys a Value and Growth Score of A and B, respectively, each helping it round out with a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best upside potential.

Current Pullback a Buying Opportunity

After MUSA shares bottomed out (around $80) during the start of the pandemic, they have turned it around in style. Murphy USA peaked in October at $323 but has fallen to around $250 since then. Despite this drop, the stock is still up 27.4% in a year while the markets have gone lower. This powerful uptrend during a bear market indicates that investors should take advantage of the discounted levels and start looking at the name to see if it’s right for their portfolio. With the company experiencing the best market conditions in years, we believe that the MUSA stock has enough firepower left to keep chugging along.

Analyst Estimates Raised

MUSA’s earnings revisions have also trended in the right direction over the past 60 days, as analysts have consistently taken up their numbers. As a matter of fact, the Zacks Consensus Estimate for Murphy USA’s 2023 bottom line has gone up from a profit of $17.79 to a profit of $18.40 during this timeframe, while the next year’s projection has gone up from a profit of $15.25 per share to $17.83.

Fundamental Strength

Murphy USA’s unique high-volume, low-cost business model helps it retain high profitability even in the fiercely competitive retail environment. The company, which sells more than 4 billion gallons of retail fuel annually, owns more than 90% of its gasoline stations. This allows Murphy USA to keep its operating expenses low. The proximity of Murphy USA’s fuel stations to Walmart supercenters helps the company to leverage the strong and consistent traffic that these stores attract, thereby driving above-average fuel sales volume.

The industry’s improved fundamentals in the form of constrained supply and robust demand for refined products like gasoline have led to rising refining profitability for the players involved. As a reflection of this, Murphy USA’s average retail gasoline price in 2022 came in at $3.63 per gallon, up from $2.63 per gallon a year ago.

Murphy USA’s 2021 acquisition of QuickChek Corporation — a family-owned food and beverage chain located — has helped the company to improve its offerings. In particular, QuickChek’s presence in large population centers like the New Jersey/New York region is likely to have driven Murphy USA’s merchandise revenues and margins.

Finally, MUSA’s disciplined capital allocation strategy between growth and stock buybacks has been a key differentiator. While organic growth remains the top priority for Murphy USA, the company’s high cash flow generating ability is expected to support its $1 billion repurchase plan.

Bottom Line

Given this backdrop, it should be prudent to consider buying shares of Murphy USA. While there are some apprehensions that the company may have gotten too far ahead of itself, especially with the prevailing inflationary pressure, the tightness in product demand should keep gasoline margins elevated going forward. This suggests strong long-term cash flows that should support higher price points for its shares.

Other Energy Stocks to Buy

Along with Murphy USA, investors interested in the energy sector might look at operators like NOW Inc. (DNOW - Free Report) , Valero Energy (VLO - Free Report) and Sunoco LP (SUN - Free Report) , each carrying a Zacks Rank #1 (Strong Buy) currently.

You can see the complete list of today’s Zacks #1 Rank stocks here.

NOW Inc.: DNOW beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters. NOW has a trailing four-quarter earnings surprise of 41.3%, on average.

DNOW is valued at around $1.1 billion. NOW has seen its shares decline 23.7% in a year.

Valero Energy: Valero Energy is valued at some $46.2 billion. The Zacks Consensus Estimate for VLO’s 2023 earnings has been revised 2.5% upward over the past 30 days.

Valero Energy, headquartered in San Antonio, TX, beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters. VLO shares have gained 40.6% in a year.

Sunoco LP: SUN beat the Zacks Consensus Estimate for earnings twice in the trailing four quarters. Sunoco has a trailing four-quarter earnings surprise of 21.6%, on average.

Sunoco is valued at around $4.2 billion. SUN has seen its shares edge up 1.7% in a year.

See More Zacks Research for These Tickers

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Valero Energy Corporation (VLO) - free report >>

Sunoco LP (SUN) - free report >>

Murphy USA Inc. (MUSA) - free report >>

NOW Inc. (DNOW) - free report >>

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