A (Great) Regional Grocer Trading for Cheap

A (Great) Regional Grocer Trading for Cheap

In the realm of publicly traded grocery stores, the higher-margin health food stores hold market darling status while the more traditional players (and often slow growers) receive tempered valuations and lower expectations. One regional player, Ingles Markets , is a Southeastern chain with more than 200 stores in addition to fluid dairy-processing facilities and a shopping center rental business. At under nine times forward earnings estimates, Ingles trades at a steep discount to the majority of its peers while posting 49 years (yes, 49) of consecutive sales growth. With fourth-quarter sales rubbing up against the $1 billion mark and a market cap of just $555 million, this grocery store could be a superfood for your portfolio.

Fourth-quarter and full-year numbers
For Ingles' fourth quarter, sales grew 1.8% to $948.9 million. Same-store sales, absent of gasoline sales, grew 1.3% in the quarter. A higher average check and shopper frequency led the increases.

On the bottom line, the company hauled in $15.6 million in net income -- 17.2% higher than the previous year's $13.3 million.

Ingles' full-year 2013 saw sales rise a little more than 2% to $3.74 billion -- capping 49 years of consistent sales growth. On a net income level, the full-year take was lower, but only because of a $43.1 million pre-tax debt extinguishment charge. Ingles earned just $20.8 million, or $0.87 per share, before adjusting for the charge (worth an after-tax net of $26.2 million).

A big win for Ingles this year was recapitalizing its substantial debt load at a much more favorable rate -- 5.75% versus 9.5%. The company extended its maturity dates and, though it picked up a hefty charge for the year, is well-positioned for growth in the coming years.

Valuation talk
As mentioned, Ingles trades at a steep discount on a forward earnings basis. Supermarket juggernauts Safeway and Kroger trade at 19.3 times and 13 times, respectively.

Investors do need to consider Ingles' debt load, though, when talking about relative valuation. Though under the $600 million mark in market cap, the company's enterprise value is more than $1.5 billion due to its near-$900 billion debt. Still, on an EV/EBITDA basis, Ingles trades at just 6.98 times trailing EBITDA.

Ingles faces the issues that the whole industry does, but it doesn't hurt otherwise. Margins are always cramped, competition is fierce, and costs fluctuate fast. These can move short-term earnings up or down and disturb the market. What's more important for the long term, though, is valuation and the store itself. The author has had the ability over the years, due to a long-standing nearby store in the company's home state of North Carolina, to experience and observe a larger-format Ingles. While lackluster 10 or 15 years ago, for the past five or six years it has been remodeling and innovating and has made it one of the best-looking mainstream supermarkets around and an enjoyable shopping experience. Part of this is due to a good store manager, but much of its improvements clearly came from the corporate level. Other Ingles stores, as they have evolved over the years, are of a similar quality.

With a bargain-priced stock and distinguished stores and plenty of room to grow, Ingles is a great grocery stock to keep an eye on.

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