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Casey's General Stores

(CASY) - Get Report

operates and franchises convenience stores and self-service gasoline stations in the Midwest. Locations sell freshly prepared pizza, doughnuts and sandwiches as well as beverages, tobacco and make-up.

Casey's expansion strategy is unusual. Most retailers try to get the "most bang for their buck" by establishing stores in congested areas. Casey's, on the other hand, favors communities with populations of fewer than 5,000. The small-town niche fosters customer loyalty and stable business volume.

Yesterday, the company reported impressive quarterly results. Although revenue declined 24% to $1.2 billion, profit rose 53% to $44 million, or 87 cents a share. Casey's gross margin rose from 13% to 19% and its net margin jumped from 2% to 4%. The shares were up 7% in after-hours trading.

Profit spreads improved due to growth in the Prepared Food & Fountain unit, Casey's most lucrative segment. An expanded menu of coffee and made-to-order submarine sandwiches boosted the segment's gross margin to more than 60%. Same-store sales, a measure of organic improvement, rose in every segment.

During the past fiscal year, Casey's constructed 16 new stores and acquired another 16, increasing its total store count by 2%. Sustainable growth has helped preserve a clean balance sheet. Although $171 million of cash and a quick ratio of 0.9 indicate less-than-ideal liquidity, the debt-to-equity ratio is modest at 0.2.

Over the past year, Casey's dropped 5% as the Russell 2000, a small-cap barometer, fell 20%. The shares have a beta, a measure of market correlation, of just 0.5. We give Casey's a volatility score of 5.4 out of 10, higher than the "buy"-list average of 4.6.

The stock offers a dividend yield of 1.2%, less than the S&P 500 average of 3.6%. But the payout ratio, a measure of dividend safety, is in stable territory at 10%. It's likely that management will continue to increase distributions. Casey's has routinely increased its dividend since 1990.

-- Reported by Jake Lynch in Boston.