2024-01-03 01:46:00 ET
Summary
- Ingles Markets' H2/FY2023 results show solid performance, as margins have been sustained at a great level with mostly stable revenues.
- After my previous write-up, the stock has remained relatively flat despite earnings above my expectations.
- The stock still seems to have a great undervaluation, as my DCF model estimates a very good amount of upside.
Since my last write-up on Ingles Markets ( IMKTA ), published on the 1 st of August with a buy rating, the company has reported its H2/FY2023 results. The results have been solid, improving my confidence in Ingles Markets’ earnings capability. In my previous analysis, I had eyes on the company’s profitability, as it has been largely boosted by the Covid pandemic’s effects. With the reported results, I believe that the company is worthy of an update.
The stock has performed quite stably. From the write-up, the stock has had a total return of 2%, compared to an S&P 500 performance of 4%. Initially, the stock took a dive after my analysis, presumably due to rising interest rates, but has recovered since.
A Solid H2 Performance
Ingles Markets reported solid results in the second half of FY2023. The company’s revenues grew by 3.8% in the period, above my estimates in the previous write-up – I believed that a lowering food inflation and gas prices would have started to have a negative effect on Ingles Markets’ revenues. For the entire year, revenues were slightly better than I anticipated.
The profitability has still stayed at a good level, above figures achieved prior to the pandemic. In FY2023, Ingles Markets’ EBIT margin was 4.9%, still well above the company’s FY2015-FY2019 average margin of 3.3% prior to the pandemic. The company does have a note in its annual report that the Covid pandemic still had an effect on its operations in FY2023, although at a lower level than in previous years; I still believe that margins are likely to fall further, although the performance is a positive surprise compared to my expectations – it seems that Ingles Markets has improved its profitability partly sustainably as well, and not just through temporary pandemic influences.
Capital Expenditures Above Historical Rate
In FY2023, Ingles Markets had around $174 million in capital expenditures , up quite significantly from previous years. The figure is also well above the total depreciation of just $116 million in the year. Although new stores weren’t opened in the year with the total store count still at 198, the capital expenditures did have some expansion investments and not only maintenance capex – the company’s square footage increased very slightly by 61 thousand square feet, around half a percentage of the current total square footage. In addition, Ingles Markets purchased fifteen new store sites/land parcels in FY2023 up from six in FY2022, and a single new fuel station.
For FY2024, Ingles Markets is expecting $120 million to $170 million in capex, with the middle point being more in line with the company’s historical average than the $174 million spent in FY2024. The amount includes some investments in technology, and the company’s milk processing plant, but most seem to be related to maintenance capex; in the long term, Ingles Markets expects capital expenditures to be in the range of $100 million to $160 million. The middle point is still above Ingles Markets’ depreciation, making the company’s cash flow conversion a bit poor.
Updated Valuation
In my previous analysis, Ingles Markets traded at a trailing P/E multiple of 6.5. Since margins have begun to normalize, the multiple has risen moderately to a current level of 7.8 as the stock price has remained relatively flat.
Compared to estimates in the previous write-up, I have kept the revenue estimates mostly stable, although slightly different for the next couple of years – I estimate the revenues to slow down in the next couple of years. After FY2025, I estimate a stable revenue growth of 2.0%. On the other hand, I’ve raised my EBIT margin estimate for the long-term quite positively from a previous long-term estimate of 3.67% into a new 4.0% estimate. With the higher amount of capex, I estimate the cash flow conversion at slightly worse than previously. Summing up the updates, I estimate an EBIT of around $278 million for FY2032, up from a previous estimate of $251 million.
With the mentioned estimates along with a cost of capital of 7.25%, the DCF model estimates Ingles Markets’ fair value at $136.47, around 58% above the stock price at the time of writing. The estimated fair value is up around 8.7% from the estimated fair value of $125.53 in my previous write-up due to a higher EBIT margin estimate as well as the slightly lower cost of capital.
The used weighted average cost of capital is derived from a capital asset pricing model:
In the most recent reported quarter, Ingles Markets had around $6.0 million in interest expenses. With the company’s current amount of interest-bearing debt, Ingles Markets’ annualized interest rate comes up to 4.32% - the estimated interest rate is slightly down from a previous estimate of 4.50%. I’ve slightly raised my debt-to-equity ratio estimate from 20% to 25%. For the risk-free rate on the cost of equity side, I use the United States’ 10-year bond yield of 3.97% , compared to a previous figure of 3.93%. The equity risk premium of 5.91% is Professor Aswath Damodaran’s latest estimate for the United States, made in July. Yahoo Finance estimates Ingles Markets’ beta at a figure of 0.64 , down moderately from the previous 0.68 estimate. Finally, I add a small liquidity premium of 0.5%, crafting a cost of equity of 8.25% and a WACC of 7.25%. The WACC is down from a previous estimate of 7.43% but at an insignificant scale.
Takeaway
Ingles Markets’ financial performance has been quite good since my last write-up. The company’s revenues have still had positive growth in H2 against my previous estimates. In addition, the profitability has been better than I anticipated as for FY2023, the EBIT margin was still at 4.9%, well above pre-pandemic figures. The company has also spent a good amount in capex, worsening cash flow conversion, but possibly improving the future bottom line with a minor amount of expansion and technology improvements. With the relatively flat share price from my previous write-up, the valuation also still seems to have good upside. I remain with a buy rating, as the stock still seems to have a favorable risk-to-reward for risk-averse investors.
For further details see:
Ingles Markets: Still Low-Risk And Cheap