Risk-Reward With Weis Markets

Takeover target with excellent long-term potential

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Nov 09, 2017
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Weis Markets Inc. (WMK, Financial) is a regional grocer with 204 locations across Pennsylvania and the surrounding Mid-Atlantic states. It has all the basic traits of a plain vanilla grocer and while Whole Foods, under Amazon’s (AMZN, Financial) ownership, will open more stores with the intention of taking market share from Kroger (KR, Financial), companies like Weis Markets still hold valuable real estate in local communities.

Weis fell 18% earlier this week after third-quarter results disappointed, almost 50% from its one-year high. Comparable sales for the last quarter were up 1.5%, but the company’s promotional and pricing programs along with price deflation in key categories sent net income down 58% to $4.45 million.

Over the past decade, Weis turned in solid results year after year. With last year’s acquisition of 44 supermarkets, the revenue is turning over at more than $3.5 billion a year with a tidy profit. The balance sheet is strong with a positive net current asset value, but this is not an NCAV trade.

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Amazon is likely going to continue changing the retail industry, but from recent events this looks more like a reshaping of how it is now than a total annihilation of brick and mortar.

If anything, Weis is a dividend play that may lead into a takeover target if the grocery wars heat up. Weis has a long history of paying dividends, going back 30 years. Based on its current price, this year’s payment will yield a 3.43% return.

Add that to a stock trading well off its historical multiple valuation and it looks like a bargain. A screaming buy? No, but there are not many of those at this point, with the market pushing higher past the typical bull market cycle.

Of course, it is future results that matter. Grocers, as a group, have the ability to increase sales and profits just by surviving due to the nature of the industry. Prices for food products will continue to rise as fast or faster than inflation.

Looking ahead to 2018 to 2020, competition will heat up, which could pressure the company’s margins; however, Weis is not backing down. It is building distribution capability, recently expanding its main facility in Pennsylvania to add capacity for dairy, deli and frozen food items, which will improve productivity. It is also developing new locations and looking for new acquisitions. Weis could merge with SuperValu Inc. (SVU, Financial) and be in a position to compete directly with Whole Foods. It could acquire Southeast regional grocer Ingles Markets Inc. (IMKTA, Financial) and double sales and profits. Regardless of what happens, the barrier to entry is pretty high in this business, so I do not expect much in the way of new competition, but that is also why Amazon’s presence is so noteworthy. It still thinks and acts like a startup by always trying to find ways to serve customers better and innovating at every step.

Disclosure: I am not long/short any stocks mentioned in this article.