Sunday, 17 December 2017

Weis Markets

Company: Weis Markets
Industry: Grocery Stores
Geography: US (Pennsylvania, New York, Maryland, DC, New Jersey, Virginia, West Virginia & Delaware)
IPO Year: 1988
Current Valuation:
CompanyMarket Cap ($M)P/E(ttm)P/S(ttm)P/B(ttm)P/FCF(ttm)Yield (ttm)Sales 5Yr CAGRROIC(ttm)LTDebt/Eq (mrq)
Supervalu741.10.052.02-6.40%11.00%4.80
Smart & Final Stores629.188.950.141.104.798.90%3.60%1.11
Village Super Market234.615.830.151.1414.854.30%2.40%7.40%0.15
Ingles Markets Incorporated606.213.730.161.3520.692.00%1.50%1.68
The Kroger Co23,420.015.920.23.8524.861.89%5.00%11.90%2.13
Median-24.810.231.7717.512.00%2.60%7.40%1.01
Natural Grocers by Vitamin Cottage196.329.120.261.5118.00%5.50%0.44
Weis Markets1,100.014.540.311.189.912.92%2.60%6.10%0.06
Average-47.300.374.7415.882.42%7.00%7.93%1.47
Casey's General Stores4,050.025.040.533.490.98%1.40%10.40%0.91
Sprouts Farmers Market3,200.024.810.715.2520.1729.60%13.10%0.77
iFresh159.7197.81.1926.522.40%2.61
Relative to the other grocery store companies, Weis ranks very well in terms of its current valuation because:
  • Its P/S multiple is in the middle of the pack (less than average, higher than median).
  • The 5Yr CAGR is in the same spot (and equal to Kroger).
  • It has almost no debt which unique and welcome in a business which runs on very slim margins and high fixed costs. The debt it does have is a revolving credit line with a variable rate. This is good.
  • The yield on the name is the second highest in the business.
  • It seems a fucking steal at 9x free cash flow
Fair Value:
Current Price = $41.03
  • No Tax Bill - $44.07 (~8.35% buffer)
  • With Tax Bill - $56.07 (~26.36% buffer)
  • Best case - $70.76 (tax change+industry level growth+normal margins)
  • Worst case - $41.89 (no tax change+ CAGR level growth+lower margins)
  • Based on the metrics shown below and using a 5% growth rate for the next 5 years on the assumption of newly acquired stores tapering off to the US10Yr Bond yield of 2.35% by year 10
  • With and without a tax rate reduction, there is at least some amount of a buffer
  • Assumed a margin of 3.56% which is the 10 year historical margin (but note the deviation below)
  • Assumed a sales/capital ratio of 4.10 which their 10 yr average capital efficiency
Operating History:
Item10Yr CAGRTTM2016201520142013201220112010200920082007
Revenue ($M)3.77%$3,508$3,137$2,877$2,777$2,693$2,701$2,753$2,620$2,516$2,422$2,319
EPS4.95%$2.82$3.24$2.21$2.02$2.72$3.07$2.81$2.54$2.33$1.74$1.89
Dividend $0.34%$1.20$1.20$1.20$1.20$1.20$1.20$1.17$1.16$1.16$1.16$1.16
FCF/Sh-6.75%$0.88$1.73$1.01$0.48$0.51$1.12$2.86$2.73$1.77$0.79
Working Cap ($M)2.80%$207$233$224$212$230$220$233$173$159$157
Book Value/Shr3.58%$34.85$33.25$32.39$31.68$30.71$29.58$28.30$27.07$25.68$24.52$24.04
SharesOut (mn)2727272727272727272727
__WtdAvg Deviation____LEVELS______
Gross Margin %2.28%27.10%27.80%27.30%27.10%27.70%27.50%26.70%27.20%27.00%25.90%26.00%
Operating Margin %21.23%2.30%3.10%3.20%2.90%4.20%4.70%4.20%4.00%3.80%2.80%3.20%
Tax Rate %8.02%29.36%30.08%35.74%35.10%38.10%36.97%35.73%36.41%35.86%32.97%34.43%
Net Margin %15.38%2.16%2.78%2.06%1.99%2.66%3.05%2.75%2.61%2.50%1.94%2.20%
OCF Margin %12.16%4.13%4.85%4.76%4.43%5.31%4.59%5.52%5.61%4.73%4.75%3.67%
Cap Ex as % of Sales27.05%3.22%4.61%3.23%2.90%4.79%4.08%4.02%2.67%1.80%2.78%2.77%
FCF Margin%67.40%0.92%0.22%1.53%1.53%0.51%0.51%1.52%2.93%2.92%1.98%0.91%
ROA%16.37%5.61%6.54%4.89%4.72%6.41%7.79%7.48%7.16%7.12%5.57%6.17%
ROIC%15.30%7.89%9.04%6.86%6.25%8.23%10.25%9.80%9.33%9.29%7.18%7.98%
Reasons I would buy:
  • It's family owned and family run. The Weis family continues to run the business and this is a huge plus to me
  • The business itself is a good employer. They take care of their employees. Not only is this the right thing to do, it lowers employee turnover which is a massive cost savings at the store level
  • They are still small enough that added growth has a high degree of operational leverage, i.e. with every added $1 in revenue, a larger % falls to the bottom line
  • They have a strategy of steady acquisition rather than chase pure price competition. In the last year they bought ~50 stores. I like this model for the grocery business because a larger operation is immediately a more cost efficient one which means buying more stores not only improves their profitability, it also adds to your existing stores' profitability
Reasons I am apprehensive:
  • They are relatively tiny which means the big boys can seriously out compete them on discounting. Food retail is all about penny profits and the big guys have lots of pennies to play with
  • The family ownership makes a takeout unlikely even though this company would be a great acquisition for someone like Kroger or possibly Costco if they decide to enter the 'modern grocery' industry in their bid to open smaller stores.
  • While their acquisition strategy is solid, this is still a low margin business and acquisition by ego can damage the operations really badly. Basically, if they get an idiot to run the show, bad things can happen very quickly.
  • Their recent operating history is not good. They whiffed on growth and basic things like inventory management in their new stores. Since it was their largest purchase, I am willing to give them the benefit of the doubt for now but it's worrying. Inventory control is fundamental to the grocery business.
What I am likely to do:
  • I will probably buy the stock.

Saturday, 4 November 2017

For posterity in the wake of the BoE rate rise

The Old Lady of Threadneedle street hiked rates for the first time in a decade on Thursday 2 Nov, 2017. Rates went up 0.25%, back to their pre-referendum level.

It shouldn't matter really. It's a tiny figure and it was a relatively temporary reduction to begin with. However, as the market reaction is telling us (GBP down, Gilts up) it did matter. It mattered most likely because 17 months post-referendum, the UK economy and its future prospects are decidedly worse off. Inflation is almost at the 3.1% level where Carney needs to write to Treasury to explain the failure in containing inflation to the 2% level. More importantly, the BoE believes the UK GDP will only grow at 1.5% from here on out. That's 60% of the 2.5% growth rate we had since WW2. That's bad news bears.

And it gets worse. Here is a summary of key metrics since the 2007 crash (From FT)

Since the last rise in Bank rate on 5 July 2007:
- GDP is 10.9 per cent higher;
- Productivity (output per hour) is 0.5 per cent higher;
- Average prices (CPI) are 27.7 per cent higher;
- Real pay excluding bonuses is 2.5 per cent lower;
- The FTSE 100 is 12.9 per cent higher;
- 10-year gilts are 4.1 percentage points lower;
- $/£ is 68 cents lower;
- Unemployment - the rate is 1 percentage point lower;
- Employment - the rate is 2.5 percentage points higher - 2.7m more people are in employment.

To put it simply, people have lost 3% of their income but everything costs ~28% more likely because we import everything and the £ has lost value. Salaries aren't even keeping pace with productivity change which is abysmally low anyway so it seems the only reason GDP grew at all is that there are simply more people in the UK working, paying taxes and buying evermore expensive biscuits.


Monday, 9 October 2017

Why is US inflation low as unemployment continues to fall?

Well I don’t know the answer of course but in light of having re-read Neel Kashkari’s “Why I Dissented Again” entry I thought I might as well throw in what little bit of data spelunking I have done. I doubt this is something brand new to the serious brains @MinneapolisFed and other institutions but on the off chance that they or someone else was curious I thought I would put it here as well.
The post talked about the disconnect between the rising numbers of people joining the workforce (shown in falling unemployment) and a core inflation rate that refuses to rise as would be expected when more people have more employment income.

My own wandering mind settled on the following information:
Compound Average Growth Rate Q2 over Q2 (2013–2017). The numbers come from the Bureau of Economic Analysis, specifically their Personal Income and Disposition dataset.

The story being shown is a simple one and best told in bullet points (my favourite!)

1. The pace of increase in disposable incomes has slowed down considerably in the last 2 years)
2. Total amount of expenditure (Outlay) continues rise steadily. Together with the slowing rate of growth in disposable incomes, this means a declining rate of savings which is shown in the last line of the table
3. The rate of consumption continues to outpace disposable income growth
4. The amount of money spent on interest payments is not only rising 3x faster than incomes and almost 1.6x as fast as consumption but it is increasing quicker than almost anything else (Note: transfer payments are growth faster but they are a tiny tiny portion of total outlay)

The conclusion is this. Core inflation continues to fall even though more people are joining the workforce because more and more of the money US workers are earning is going to pay of the debt they accrued when rates were lower. Remember those stories about x% of people couldn’t handle a y% rise in rates? I would say this is the manifestation of that.
I guess what I am trying to say is…

...kinda.

Authors Note: This is a reproduction of a post from earlier in the year.