Analyst: CST Brands on the Cusp of Accelerated Growth

SAN ANTONIO -- Now that it has been "unleashed" from former parent company Valero Energy Corp., CST Brands Inc. is "on the cusp of an accelerated growth trajectory," Wells Fargo Securities LLC Senior Analyst Bonnie Herzog wrote in an equity research report released today.

There are a lot of reasons to like CST Brands, operator of 1,040 U.S. Corner Store convenience stores and gas stations, she said. Chief among them are improved merchandise offerings, combined with its large-format new-to-industry stores.

"We are encouraged thus far by several of CST's initiatives and believe the results of its strategic review, which may uncover even more opportunities, could be a positive catalyst for the stock," Herzog stated.

A strong Texas economy near its San Antonio headquarters is another reason Herzog likes CST Brands' stock. In addition, the retailer has a strong balance sheet to pursue new growth and acquisitions, she cited.

Yet another positive is CST Brands' Canadian c-store division, which provides stability to its business due to high barriers to entry, low fuel-margin volatility and high fuel margins, the senior analyst noted.

Despite the bullish commentary, Wells Fargo tagged CST Brands with a "Market Perform" stock rating. A sharp pullback in the company's stock price; a strategic review uncovering greater upside than currently expected; and a greater acceleration of new-to-industry stores would get Wells Fargo even more excited about CST Brands' stock, Herzog wrote.

"As a standalone company, CST now has an opportunity to fully focus on its retail business to drive incremental growth and profitability," she stated. "However, we believe most of the potential upside is already reflected in its current valuation."

CST Brands Inc. was spun off from Valero Energy Corp. on May 1. Shares of CST Brands traded for $33.54 on the NASDAQ National Market this afternoon. Wells Fargo believes the retailer is fairly valued at between $33 and $35 per share.