Like most grocers, Ingles Markets (IMKTA, Financial) has done quite well during Covid-19 with record earnings. However, the stock is not up as much as its larger competitors like Kroger (KR) and Walmart (WMT). This might mean that it's undervalued, and the shares could have an opportunity to play "catch-up" in the future. Let's take a look under the hood.
Ingles Markets is a supermarket chain that operates in the southeast United States, mainly in Georgia, North and South Carolina and Tennessee. It had 197 grocery stores as of 2020, as well as 109 pharmacies and 106 fuel stations
Gabelli Funds (Part of Mario Gabelli's GAMCO Investors) owns over 1.0 million shares of Ingles Market, giving it 4.98% of shares outstanding. According to Gurufocus, Gabelli has held shares in the stock since 2009. Gabelli had the following to say about the holding in 2019:
"We view Ingles as an attractive acquisition target considering its ability to stay relevant with its core consumer, a well maintained store base, and high real-estate ownership, including eighteen undeveloped sites. IMKTA shares trade at a 50% discount to our 2020P PMV of $64 per share, which is based on 7x rent-adjusted 2020P EBITDA and includes our estimate of $748 million in company owned real-estate value."
The company is still controlled by the founding Ingles family with super-voting B shares. The company's earnings and cash flow have shot up due to the pandemic. However, this boost is likely temporary, as once the pandemic is under control earnings will revert back to the trend, which is much lower.
The company is using this opportunity to deleverage and has paid down ~300 million of debt since last year. This should put the company is a stronger position going forward. Debt maturities are well spread out.
The company is asset-heavy since it owns many of the stores. It owns 161 of its 197 supermarkets either as free-standing locations or in shopping centers where it is the anchor tenant. The company also owns 22 undeveloped sites that are suitable for a free-standing store or shopping center development.
Ingles owns numerous out-parcels and other acreage located adjacent to the shopping centers and supermarkets it owns. The shopping centers owned by the company contain an aggregate of 7.7 million square feet of leasable space, of which 4.0 million square feet is used by the company's supermarkets. The remainder of the leasable space in these shopping centers is leased or held for lease by the company to third-party tenants.
Ingles also owns a 1,649,000 square foot facility which is strategically located between Interstate 40 and Highway 70 near Asheville, North Carolina, as well as the 119 acres of land on which it is situated. The facility includes the company's headquarters and its warehouse and distribution facility. The property also includes truck servicing and fuel storage facilities. It also owns a 139,000 square foot warehouse on 21 acres of land approximately one mile from its main warehouse and distribution facility.
The milk processing and packaging subsidiary, Milkco, Inc., owns a 140,000 square foot manufacturing and storage facility in Asheville, North Carolina. In addition to the plant, the 20-acre property includes truck cleaning and fuel storage facilities.
It should be noted that some of the long-term debt of the company is secured by the owned properties. Regardless of this, I think the property ownership gives the company a distinct advantage.
The company has high Business Predictability score, so the earnings-based Discounted Cash Flow method is suitable for helping determine the intrinsic value. Using a starting EPS of $3.80 (which I took from the trend line), a discount rate of 9%, a growth rate of 7.5% for the first 10 years and 4% for the second 10 years, I get a value estimate of $101.47.
Please note, I added the tangible book value because much of the real estate of the company is owned rather than leased. Tangible book value has grown at a rate of 7.2% over the last 15 years.
Gurufocus' new performance chart shows that Ingles Market has returned 11% per annum over the last decade, which is comparable to its much larger competitors.
Ingles Market is taking advantage of the free cash flow generated indirectly due to increased business during the pandemic to strengthen its balance sheet. The huge amount of real estate the company owns also gives its stability.
Thus, I believe the company is highly undervalued when these factors are considered together with the discounted cash flow valuation method. If the Ingles family ever decides to sell out, the stock price could easily go into the triple digits. It has the potential to be a good, high quality, long-term hold for patient value investors who want to own real assets that can hold up to monetary inflation.
Disclosure: The author does not own shares of Ingles Market.
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