Over the last two weeks I’ve been digging into this company. I bought about 3,000 shares around $5.60, prior to doing much work, because I felt like there was a large margin of safety due to the cash position. Also, I suspect Q3 results will be pretty good – although the outlook for Q4 and Q1 is weak. I have since read through all the SEC filings and downloaded historical quarterly financial data from Capital IQ in order to build a quarterly model that focuses on store-level operating performance and the key drivers (diesel, gallons sold, miles driven, etc.).

I have seen a number of recent posts questioning why the company has such a low market cap in spite of $5B of revenues. The short answer is that revenues have very little bearing on valuation. Equity value is (or at least, should be) a function of 1) a company’s ability to generate cash earnings and 2) the level of obligations the company has that rank senior to the equity. So I’ve spent the last few weeks building a detailed cash flow model that values the company.

I am going to post these thoughts in a three pieces due to the 4000 character limit.

There are a number of moving pieces here. The Petro acquisition, which should be accretive, wasn’t fully digested before the economy tanked so we can’t get a clear view of how that acquisition has impacted profitability. The cost of diesel has been quite volatile. The company has added and deleted stores. The business is somewhat seasonal. Etc. Because of this, I’ve looked at most everything on a per-store basis and have driven the projections off of three key variables: miles driven, price of diesel, profit per gallon.

- There is a forward curve for the price of diesel through Q1 2011 that I took from Bloomberg.
- I made my own assumptions regarding miles driven
- Profit per gallon is correlated to price of diesel, so I linked the two (although not 1:1)