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​Competition is a given in any business, but it’s white hot for convenience stores. This crowded field includes scads of mom and pop operations, as well as the massive nationwide chains of 7-Eleven, Hess Corp. (NYSE: HES), Exxon Mobil Corp. (NYSE: XOM) and others.

With so little to set them apart, industry participants can usually command little in the way of pricing power or customer loyalty. Profit margins are typically scant. So it’s the rare gem that’s able to develop lasting competitive advantages and consistently deliver superior financial metrics.

And I’ve found such a gem: Casey’s General Stores, Inc. (Nasdaq: CASY) is a thriving Midwestern chain operating both self-service gas stations and convenience stores.

This business model is common, but Casey’s turned it into something special. The company’s sales have historically grown at an 11% pace and are nearing $8 billion, up from $2.8 billion in fiscal (April) 2005. Profits climbed by more than sixfold during that time to $181 million annually.

Not surprisingly, Casey’s stock is demolishing the S&P 500.

How did Casey’s become such a standout? For one thing, by taking the road less traveled. Nearly 60% of its 1,878 locations are in towns with populations of less than 5,000, and the vast majority are in communities of less than 20,000 people.

Translation: In these smaller communities, Casey’s often faces less opposition and in some instances might even be “the only game in town.” That was the experience of Gurufocus.com analyst Micah Martin, who grew up in a small Iowa town where Casey’s was the sole gas station.

In his 2012 analysis of the company, Martin also stressed that Casey’s was “the place to go for fresh doughnuts in the morning, pizza on a Friday night and a cold Coke in the summer.” When he wrote that, there were still no competitors “within four miles in any direction.”

While most of the company’s stores don’t typically enjoy that level of exclusivity, the takeaway is that most stores have more limited competition than convenience store operators that are focused on more heavily populated areas.

What’s more, the company only operates in 14 states, with most locations concentrated in three: Iowa, Missouri and Illinois. This means Casey’s has plenty more room to grow within existing markets and ample opportunities to enter other states. It’s been adding roughly 50 new locations annually for the past few years, though management plans to double that pace in the coming years.

Still, a solid location is only part of the equation. Like any retailer, Casey’s must woo customers.

Selling gasoline helps immensely by providing a reason to visit regularly. But fuel is usually a lower-margin product, regardless of what’s happening with crude oil prices. So fuel sales generally don’t do much for the bottom line, despite accounting for two-thirds of revenue.

For Casey’s, the keys to profitability are its food-related segments: groceries and prepared food, with gross margins of 32% and 60%, respectively. Thanks to these segments, Casey’s is generating net margins in excess of 2%, compared with the industry average of 1.4%, according to Morningstar.

That may not sound like much of a lead. But it can be the difference between mediocrity and outperformance in the convenience store business, as Casey’s has shown.

The company goes to great lengths to protect this advantage, stocking popular brands of a wide array of packaged foods, beverages and non-food items such as tobacco products and automotive supplies. Management also places a particular premium on store aesthetics: Casey’s is well into a multi-year renovation cycle aimed at ensuring a modern, upscale ambiance.

Changes typically include expansion of the highest-traffic areas like the coffee bar, beer coolers, sandwich deli and fresh baked goods section. Renovated stores in somewhat larger communities of 5,000-to-10,000 residents are also frequently being converted to a 24-hour schedule to accommodate round-the-clock demand.

Store operating expenses can rise by as much as 15% post-makeover, but it’s worth the cost. In-store sales generally climb 20%-to-30% in the year following renovations, according to management.

Looking ahead, the company should also get a solid performance boost from pizza delivery, a service that’s currently available at about 20% of locations and is being steadily expanded. Adding pizza delivery typically lifts a location’s prepared foods revenue by 25%-to-30%, management estimates.

Thanks in large part to the rising popularity of Casey’s pizza, same-store sales in the prepared foods group have shifted into high gear; they shot up by about 12% in fiscal years 2014 and 2015, for example. The grocery segment’s same-store sales are impressive, too, rising in the 7%-to-8% range in fiscal 2014 and 2015. 

Such performance portends better-than-average earnings expansion. Analyst projections for a growth rate slightly greater than the historical average of 11% implies roughly 70% upside for Casey’s stock over the next five years.

Risks To Consider: Higher gas prices are further squeezing the already low-margin fuel segment. Conversely, a pullback in gas prices would help margins. With its focus on pizza, the prepared foods segment is especially vulnerable to higher costs for key ingredients like meat and cheese.

Action To Take –> Through a unique and well-executed business model, Casey’s General Stores is setting itself apart. A solid balance sheet and debt levels in line with industry norms not only buoy attractive growth prospects, but suggest that Casey’s can keep improving as a dividend payer. (It yields about 1% and shareholders have received a raise every year since 2003.) With an earnings multiple of 21, Casey’s trades at a 25% discount to the industry average, making the stock a compelling value right now.

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