Ingles Markets: The Trend Is Definitely Up


Price:$17.75

Forward P/E:10

Earnings Growth:10%

Projected Sales Growth:1%

Market Cap:$433 million

Why It's Featured: Margins widening; good yield; high management ownership.
Danger Zones: Highly leveraged; consumers moving upscale when economy recovers.

Ingles Markets, Inc. IMKTA operates a supermarket chain in the southeast United States.  Its supermarkets offer food products, including grocery, meat and dairy products, produce, frozen foods, and other perishables; and non-food products, such as fuel, pharmacy products, health and beauty care products, and general merchandise, as well as provides private label items.

They also offer products and services, such as home meal replacement items, delicatessens, bakeries, floral departments, video rental departments, and greeting cards, as well as a selection of organic, beverage, and health-related items.

In addition, Ingles Markets engages in the fluid dairy processing and shopping center rental businesses.  The company operates 203 supermarkets, including 74 in Georgia, 69 in North Carolina, 36 in South Carolina, 21 in Tennessee, 2 in Virginia, and 1 in Alabama. As of September 24, 2011, it had 74 in-store pharmacies and 70 fuel centers; owned and operated 70 shopping centers of which 58 contain an Ingles supermarket; and owned 94 additional properties that contain a free-standing Ingles store; and owned 13 undeveloped sites. The company was founded in 1963 and is headquartered in Black Mountain, North Carolina.

Here's an unusual and important stat for IMKTA: CEO Robert Ingles owns 47% of the Class A stock and 96% of the Class B stock (as of 12/11).  That means he makes his money when the stock goes up.  It also explains why there's a decent dividend (66 cents for a yield of 3.8%).  When the CEO owns a large chunk of the company, his interests are totally aligned with shareholders.  And that's a good thing. (For investing ideas, see www.theonlineinvestor.com)

Revenues have been ramping at IMKTA since 2008 when they were at $3.238 billion.  In 2011, the company hit $3.559 billion.  Expectations for 2012 are for $3.62 billion.

Earnings haven't followed quite the same path, though they're starting to move ahead nicely.  In 2008, they finished at $2.13 but dropped to $1.40 in 2009, then fell to $1.30 before recovering to $1.60 last year.  This year, look for $1.76.  For the first quarter (ended December 30) the company matched estimates for revenues ($918.2 million, up 5.2% from 2011's first quarter) and exceeded forecasts on earnings (45 cents vs estimate of 44 cents).  (Fiscal year ends September 29). 

Same store sales continue to improve as do margins for grocery items.  To further help in the grocery stores, more transactions were completed, sizes of baskets were larger, and purchase prices were higher.  Rising prices also were evident at gas pumps and milk departments.  Expect those trends to continue in 2012. 

Management is putting more private label products on the shelves.  These items carry better margins than branded goods.  They'll help keep revenues and profits higher for some time.

Part of the price hikes were needed to mitigate unexpected spikes in the cost of dairy products, meat and seafood, all of which saw sudden and sporadic moves last year.  When these happen it's hard for management to immediately pass along the higher cost to shoppers.  Expect more volatility this year as the economy remains uncertain.

One of the benefits of that uncertain and weak economy is a consumer change of habit.  Consumers are looking to save in as many places as possible, one of them being their groceries.  They're not eating out as much.  They're preparing more meals at home with less expensive food items.  That means they're shopping more at markets like Ingles.  As long as the economy lags, this trend will continue.

This stock hit a high of $42.70 in early 2007 and has suffered ever since, bottoming at $11 in early 2009 when the whole market tanked.  It rallied late in 2010, held for a while at the $20 level, only to drift back to $14 midway through 2011.  Now it's starting to move up once again.  Can it continue higher?  It will if the CEO wants to see his wealth grow.

- Essential Numbers:
- Trailing P/E: 11.1
- Price to sales: .12
- Price to book: 1.00
- Operating margin: 3.25%
- Profit margin: 1.1%
- Return on equity: 9.29%
- Return on assets: 4.6%
- Total cash: $12.42 million
- Cash per share: 51 cents
- Total debt: $855.12 million
- Debt to equity: 197.97%
- Current ratio: 1.34
- Book value per share: $17.68
- Beta: .81
- 52 week change: - 10.97%
- Shares Outstanding: 24.43 million
- Float: 12.77 million
- Dividend: 66 cents
- Yield: 3.8%
- Payout ratio: 41%

This is a small stock suitable for investors willing to move out the risk curve further than most.  But it's a solid story with growth potential.  As long as the CEO owns such a large portion of the stock, investors can rest assured he's going to do everything he can to make this stock go higher.

- Company Web site: www.ingles-markets.com

- Ted Allrich
February 2, 2012

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