Summary
- The company’s revenues have doubled since FY13 and TTM net income is $16.3 million.
- Since FY13, the operating income margin has grown from 1.35% to 1.48%.
- The margins of the wholesale business are likely to improve further with the $30.3 million purchase of Henry's Foods.
- In my view, AMCON should be trading at above 8x P/E, which is $213.40 per share.
Introduction
I like to write about companies that lack coverage on SA and today I'm taking a look at AMCON Distributing Company (DIT). It’s a convenience-store distributor that has been around for over 30 years and I think that it seems undervalued considering TTM revenues have surpassed $1.6 billion while net income is above $16 million. The company has a decent dividend yield of 3.31% and is currently valued at just above $100 million. Let's review.
Overview of the business and financials
AMCON was established in 1986 and it has positioned itself among the largest wholesale distributors in the USA as its clients include more than 5,400 retail outlets such as convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. AMCON has a total of 7 distribution centers with 885,000 square feet of permanent floor space and has operations across 30 states, distributing more than 17,000 different consumer products in the tobacco, confectionery, beverages, groceries, and beauty care categories among others. The company also has a small retail health food arm named Healthy Edge Retail Group which operates 19 stores throughout the Midwest and Florida. These stores operate under the Chamberlin’s Natural Foods, Akin’s Natural Foods, and Earth Origins Market brands and carry more than 35,000 different products.
Turning our attention to the latest available quarterly financial results, we can see that AMCON’s main products are cigarettes and tobacco and that the health food stores are slightly in the red with an operating loss of $0.24 million for Q1 FY23. Both of the businesses don’t require significant amounts of CAPEX.
As AMCON’s main operations are in a business with low barriers to entry, margins are tight but there are some economies of scale. The company’s operating income margin has inched up from 1.35% in FY13 to 1.48% for the last 12 months. However, you might notice that the operating income has grown significantly over the past several years as AMCON has been expanding organically and through acquisitions.
In Q1 FY23, the revenues of the wholesale business continued to grow at a rapid rate and the gross margin improved to 5.6% as AMCON acquired a majority stake in local sector player Team Sledd in Q3 FY22. The latter has annual sales of about $600 million and serves retailers in West Virginia, Pennsylvania, Ohio, Virginia, Kentucky, and Maryland. AMCON previously held a minority stake, and the results of Team Sledd were accounted for as equity method investment earnings. In Q1 FY23, Team Sledd added a total of $159.9 million to AMCON’s sales and there was also a $20.6 million boost thanks to price increases implemented by cigarette manufacturers, plus another $6.4 million growth thanks to higher sales volumes. However, AMCON said that there was a $41.8 million decline in sales related to the volume and mix of cigarette cartons sold (see page 19 here ).
Looking at the future, I expect the revenues and margins of AMCON’s wholesale business to improve in Q2 FY23 as the company recently announced that it’s buying a Minnesota-based competitor named Henry's Foods for $30.3 million . The latter sells an array of staples like candy, tobacco, foodservice items, and groceries across Minnesota, Eastern North and South Dakota, Northern Iowa, and Western Wisconsin. It also has branded foodservice offerings, including Teco’s Tacos, Henry’s Homestyle Pizza, and Bunn. According to data from RocketReach , Henry's Foods is the largest convenience store supplier based in Minnesota with 275 employees and annual sales of $52 million. Data from Kona Equity , in turn, shows 269 employees and annual revenues of $54 million.
Turning our attention to the balance sheet, I find it concerning that inventories rose by over $50 million between September and December and unfortunately, there’s no explanation for this change in the Q1 FY23 financial report. What’s even more puzzling is that this happened during Q1, which is usually the weakest quarter of the year for AMCON. Compared to Q4 FY22, revenues were down by 11.8%. In my view, net debt is at manageable levels at $149.8 million but bear in mind that it will increase in the near future with the purchase of Henry's Foods.
AMCON currently has a quarterly dividend of $0.18 per share and it has also distributed $5.00 per share special dividends during three of the past four years (the latest special dividend was paid January 2023). Considering TTM net income is $16.3 million and is likely to improve with the purchase of Henry's Foods, I think there is a good chance that there will be another $5 per share dividend approved in December 2023.
Overall, I think that AMCON has a resilient wholesale business considering its revenues kept growing even through the COVID-19 pandemic and that its market valuation isn’t reflecting its improved profitability yet. In my view, an annual net income of at least $15 million per year is sustainable and the company should be trading at above 8x P/E. This would put the market valuation at $130.4 million, which is $213.40 per share.
Looking at the risks for the bull case, I think that there are three major ones. First, rising interest rates could lead to a significant decrease in net income. AMCON has two credit facilities with a combined borrowing capacity of $250 million and they bear interest at either the bank’s prime rate, the Secured Overnight Financing Rate (SOFR) or the London Interbank Offered Rate (LIBOR). As of December 2022, the average interest rate of the credit facilities was 6.45%. Second, I’m concerned that inventory levels could be getting out of hand, and I’d be relieved if they return below $140 million in the near future. Third, the daily trading volume rarely exceeds 1,000 shares which means that there could be significant share price volatility. It could be dangerous to open a large position as it would be difficult to exit without putting significant pressure on the share price.
Investor takeaway
AMCON has been growing at a decent pace over the past several years and its operating income margin has been improving. In my view, it’s reasonable to expect the annual net income to remain above $15 million, especially after taking into account the purchase of Henry's Foods. In my view, AMCON also has a good dividend yield and I think it’s just a matter of time before the share price starts to reflect the improved profitability of the business. However, I think it’s unreasonable to open a large position due to the low trading volume.
For further details see:
AMCON Distributing Offers A Good Mix Of Growth And Improved Profitability