Perhaps the most interesting retailer I have come across is a firm called English Markets (NASDAQ:IMKTA). With a market capitalization of just $1.64 billion, this player is far from a large company place of sale. And with an emphasis on supermarket chain operations throughout the southeastern United States, that’s not usually the kind of prospect I would find interesting. But the truth of the matter is that, over the past few years, management has done a really good job of growing the company’s top and bottom lines. Fast-forward to today, and we see some weakness on the bottom line, mostly due to inflationary pressures. But that doesn’t change the fact that the company’s shares are very cheap at the moment. So cheap, in fact, that I can’t help but maintain my ‘strong buy’ rating on the company’s stock after some mixed results in the third quarter of this year.
A star perspective
Back in July of this year, I wrote a follow-up article to see where Ingles Markets was from a fundamental perspective compared to the first time I wrote about it. In that article, I described the company’s continued growth as impressive. The above produced parts, as a result, that left the wider market. Despite this strong performance, the company’s shares were still fundamentally attractive from a valuation perspective. This led me to reaffirm my ‘strong buy’ rating on the stock, and indicated that I felt the company needed to significantly outperform the broader market for the foreseeable future. Fast-forward to today, and we’ve seen improved performance. But I don’t know if I would necessarily say important. While the S&P 500 is down 5.1 percent since the publication of this article, shares in the U.K. markets are down less than 2 percent.
In fact, the return differential between the company and the broader market might have been wider had we not seen some mixed results in the third quarter of this year. On the plus side, we saw revenue increase nicely, from $1.28 billion in the third quarter of 2021 to $1.46 billion in the third quarter of this year. This increase occurred despite the number of stores in operation remaining at 198. The biggest part of the increase then came from increased comparable store sales. Excluding gasoline, comparable store sales were up 5.7 percent year over year. This was helped by a 2.3% increase in the number of transactions the company saw on its premises and by a 3.4% increase in the average size of its transactions.
At first glance, this picture looks very solid. However, the company saw some weakness in the bottom line. For example, net income in the third quarter of 2022 was $67.8 million. This was down from $72 million reported at the same time a year ago. On this front, the company was negatively affected by its negative profit down from 26.4% to 24.1%. While this may not seem like a huge difference, when applied to the revenue the company generated in that quarter, the difference equates to $33.5 million in lost profit on a pre-tax basis. Inflationary pressures and increased sales volume also cost the company about $8.6 million in additional costs (including sales). Plus there were other miscellaneous items like repairs and maintenance, professional fees, and bank charges that all hit the firm as well. But not every profitability metric worsened year over year. For example, operating cash flow increased from $99.2 million to $106.1 million. But if we adjust for changes in working capital, it will drop from $101.3 million to $98.9 million. And in the same time window, we saw EBITDA drop from $128.8 million to $98.9 million.
Despite this downside weakness, results for the first nine months of fiscal year 2022 were overall stronger than the same period a year ago. Revenue of $4.23 billion surpassed the $3.65 billion reported a year ago. The company’s net income rose from $178 million to $202.6 million. Operating cash flow increased from $213.9 million to $261.6 million. And if we adjust for changes in working capital, it would have gone from $270.5 million to $293.3 million. And finally, we have EBITDA, which rose from $338.7 million to $367.4 million.
Management hasn’t really provided any guidance on what the rest of 2022 will look like. But if we annualize the results experienced so far, we should estimate net income of $284.2 million, operating cash flow of $332.1 million, and EBITDA of $504.6 million. These members post a forward price to earnings multiple of 5.8, a forward price to operating cash flow multiple of 4.9, and a forward EV to EBITDA multiple of 3.9. These numbers compare favorably to readings we use for 2021 data of 6.6, 5.4, and 4.2. As part of my analysis, I compared Ingles Markets to five similar businesses. On a price-to-price basis, these companies ranged from 7.1 to 57.4. In this case, Ingles Markets was the cheapest of the group. Using the price of operating cash flow approach, the range was between 3.9 and 19.4, while the EV approach to EBITDA came out between 3.3 and 21.1. In both of these cases, one of the companies was cheaper from our perspective and the other was tied to it.
|Company||Price / Profit||Cost/Operating Cash Flow||EV / EBITDA|
|Grocery Outlet Holding Corp. (GO)||57.4||19.4||21.1|
|Natural Foods by Vitamin Cottage (NGVC)||9.7||4.9||3.9|
|Sprouts Farmers Market (SFM)||12.1||7.7||4.9|
|Casey’s General Stores (CASY)||23.6||10.2||11.9|
|Albertsons Corporation (ACI)||7.1||3.9||3.3|
Based on the data provided, it seems to me that Ingles Markets is a really solid company with great returns and a very low share price. Although the company has experienced some margin pressure recently, something that should continue in the near future, I believe it will eventually adapt as it always has in the past. And finally, the market needs to realize its full value and pull the shares significantly from where they are today. Therefore, I maintain my ‘strong buy’ rating on the stock for now.