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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

CST Brands

July 5th 2013 CST Brands
NYSE Symbol: CST
Industry: Services
Price as of 7/3: $31.61

After a 6% correction in June, the markets bounced back smartly retracing 50% of the decline. Riots in Egypt sent the major averages lower once again this week. The summer months are typically volatile times and so far this summer is proving to be the same. The second quarter was not a good one for emerging markets and most bond funds. Both are in the red for the year. The only safe haven has been US equity markets. Economic growth should improve allowing the Fed to curtail their quantitative easing. Many investors are focusing on rotating into cyclical sectors like energy, materials, and industrials, but the slow global growth has limited any gains. The stand out this year has been small and mid-cap US stocks trading up better than 14% year to date with only modest corrections. This week we'll highlight a mid-cap spinoff from Valero Energy. The stock of the week is CST Brand. With the market volatility on the rise, boring is beautiful and CST Brand is pretty boring. The company operates gas stations and convenience stores selling gasoline, cigarettes, and alcohol. Now independent of Valero, CST Brands has plenty of room and freedom to grow and boost margins and therefore earnings. As a mid-cap stock, CST Brands is not a conservative company, nor does it provide a dividend, but with room to expand sales, CST has the potential to become a good growth company in a defensive industry.

CST Brand was recently spun off so the company has not reported earnings. At the IPO price of $28/share, CST's price/sales multiple was 0.16, roughly at par with Valero's price/sales multiple. Since then the stock has improved, but still looks cheap relative to the average valuation for its sub-sector. The average company in the food retailing sub-industry currently trades for 17.1x TTM earnings as compared to CST's valuation at 11.4x TTM earnings. The broader market trades for 14 times earnings.

Besides multiple expansion, CST Brand can improve their profits and profit margins. CST Brand sold $1.62 billion dollars worth of gasoline in the first quarter of 2013, but only $293 million dollars of other merchandise. Rival, Casey's General Store with 1735 stores derives 28.2% of its revenue from higher margin items like food and drink (food and drinks generate profit margins of 31.7% and 60.6% respectively). CST receives only 15.3% of their sales form the higher margin food, drink, and other merchandise items. With the recent spin-off, CST Brand should be able to focus on improving margins through diversifying the company's revenue base beyond lower margin gasoline sales.

Currently, CST Brands trades 0.21 times sales, 1.7 times book value of $17.93 a share. The stock trades for 14 times earnings and 13 times next years. There is no dividend, but the company could initiate a dividend in the coming years like many rivals. Competition is tough in the gas station industry, but with a below average multiple and plenty of room to expand profits, CST Brand has good potential to boost profits and their stock price.