Company: Weis Markets
Industry: Grocery Stores
Geography: US (Pennsylvania, New York, Maryland, DC, New Jersey, Virginia, West Virginia & Delaware)
IPO Year: 1988
Current Valuation:
| Company | Market Cap ($M) | P/E(ttm) | P/S(ttm) | P/B(ttm) | P/FCF(ttm) | Yield (ttm) | Sales 5Yr CAGR | ROIC(ttm) | LTDebt/Eq (mrq) |
|---|---|---|---|---|---|---|---|---|---|
| Supervalu | 741.1 | 0.05 | 2.02 | -6.40% | 11.00% | 4.80 | |||
| Smart & Final Stores | 629.1 | 88.95 | 0.14 | 1.10 | 4.79 | 8.90% | 3.60% | 1.11 | |
| Village Super Market | 234.6 | 15.83 | 0.15 | 1.14 | 14.85 | 4.30% | 2.40% | 7.40% | 0.15 |
| Ingles Markets Incorporated | 606.2 | 13.73 | 0.16 | 1.35 | 20.69 | 2.00% | 1.50% | 1.68 | |
| The Kroger Co | 23,420.0 | 15.92 | 0.2 | 3.85 | 24.86 | 1.89% | 5.00% | 11.90% | 2.13 |
| Median | - | 24.81 | 0.23 | 1.77 | 17.51 | 2.00% | 2.60% | 7.40% | 1.01 |
| Natural Grocers by Vitamin Cottage | 196.3 | 29.12 | 0.26 | 1.51 | 18.00% | 5.50% | 0.44 | ||
| Weis Markets | 1,100.0 | 14.54 | 0.31 | 1.18 | 9.91 | 2.92% | 2.60% | 6.10% | 0.06 |
| Average | - | 47.30 | 0.37 | 4.74 | 15.88 | 2.42% | 7.00% | 7.93% | 1.47 |
| Casey's General Stores | 4,050.0 | 25.04 | 0.53 | 3.49 | 0.98% | 1.40% | 10.40% | 0.91 | |
| Sprouts Farmers Market | 3,200.0 | 24.81 | 0.71 | 5.25 | 20.17 | 29.60% | 13.10% | 0.77 | |
| iFresh | 159.7 | 197.8 | 1.19 | 26.52 | 2.40% | 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 - $41.89 (no tax change+ CAGR level growth+lower margins)
- Based on the metrics shown below and using a 5% growth rate for the next 5 years on the assumption of newly acquired stores tapering off to the US10Yr Bond yield of 2.35% by year 10
- With and without a tax rate reduction, there is at least some amount of a buffer
- Assumed a margin of 3.56% which is the 10 year historical margin (but note the deviation below)
- Assumed a sales/capital ratio of 4.10 which their 10 yr average capital efficiency
Operating History:
| Item | 10Yr CAGR | TTM | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue ($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 |
| EPS | 4.95% | $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/Shr | 3.58% | $34.85 | $33.25 | $32.39 | $31.68 | $30.71 | $29.58 | $28.30 | $27.07 | $25.68 | $24.52 | $24.04 |
| SharesOut (mn) | 27 | 27 | 27 | 27 | 27 | 27 | 27 | 27 | 27 | 27 | 27 | |
| __ | WtdAvg Deviation | __ | __ | L | E | V | E | L | S | __ | __ | __ |
| 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 Sales | 27.05% | 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.
