SpartanNash: At 4.7x-4.9x EBITDA, And Amazon Is In
Summary
- SpartanNash Company distributes and retails grocery products.
- Net earnings increased from $5.7 million in 2019 to $75 million in 2020. Net income grew by close to 1,200% y/y.
- Amazon owns close to 2.5% of the company’s total share count. Both companies signed a commercial agreement.
- With the food industry trading at median EV/EBITDA of 6x-7.8x, I believe that there is an upside potential in the stock price.
- Institutional money managers Truist Financial Corp., the Canada Pension Plan, and Jane Street are among the company’s institutional investors.
SpartanNash (NASDAQ:SPTN) is undervalued compared to its industry peers. The company trades at 4.7x-4.9x adjusted EBITDA. Amazon (AMZN) recently acquired stock warrants, and insiders are not selling their stakes. The company has also paid a significant amount of its debt, and it reports long-term debt/EBITDA ratio of 2x. That's not all.
Notice that in the last year, EBITDA growth was more than 30% y/y, and sales growth stood at more than 10% y/y. In my view, if SpartanNash continues to do successful acquisitions, and more investors study the company's financials, the stock price will most likely increase.
Business
SpartanNash Company distributes and retails grocery products. It operates via three segments: Food Distribution, Military, and Retail.
Source: Company's Website
In terms of operating earnings, the company's retail segment is responsible for more than 60% of the total earnings. Food distribution is also relevant. In 2020, food distribution accounted for close to 40% of the total operating earnings:
Source: 10-K
Both the food distribution market and the grocery retail market grow at a CAGR of less than 5.1%. Hence, I would expect the company's sales to grow at less than 5.1% in the near future:
The U.S. packaged food market size was valued at USD 996.56 billion in 2020 and is expected to expand at a compound annual growth rate (CAGR) of 4.1% from 2021 to 2028.
The global food and grocery retail market size was valued at USD 11.7 trillion in 2019 and is expected to grow at a compound annual growth rate (CAGR) of 5.0% from 2020 to 2027.
Source: Grand View Research
With that about future sales growth, investors will notice that the company reports sales growth of about 9-10% y/y. In my opinion, more than half of the company's sales growth comes from inorganic growth. Note that from 2005, the company's goodwill increased, meaning that SpartanNash acquired several companies in the last 10 years. I believe that most value investors will like the company's M&A strategy.
Source: YCharts
32% EBITDA Growth y/y
The company reports a vast amount of sales growth of 10% y/y with a gross profit ratio of 15%. Last year, annual sales were equal to $9,348 million and adjusted EBITDA was equal to $234 million, 32% more than that in 2019. As shown in the image below, the company initiated a significant number of cost reduction initiatives and restructuring efforts. Net earnings increased from $5.7 million in 2019 to $75 million in 2020. Net income grew by close to 1,200% y/y.
Source: 10-K
Balance Sheet
SPTN's balance sheet seems very solid. In Q4, SpartanNash reported $2,277 million in assets, with total liabilities of $852 million. Moreover, the company has positive working capital, which investors will like. It means that SPTN can cover its short-term liabilities when it has to pay them:
Source: 10-K
I am a bit concerned because SPTN's short-term debt is more significant than the cash on hand. I think SpartanNash may have to negotiate its debt soon:
Source: 10-K
With that about the company's short-term liabilities, SpartanNash successfully diminished its long-term debt from $664 million in 2019 to $466 million in 2021. In my view, lenders will see that the company is reducing its debt obligations. It appears favourable. With an adjusted EBITDA of $234 million, the company's net long-term debt / EBITDA is 2x. With this in mind, I believe that SpartanNash's debt is under control:
Source: 10-K
I checked the company's contractual obligations. SpartanNash will have to pay $597 million in one to three years, $101 million in three to five years, and $193 million in more than five years. With the company's EBITDA of more than $234 million, I believe that it will not have significant issues while paying the contractual obligations, or it will not have to talk to lenders to obtain the required financing:
Source: 10-K
SpartanNash Trades At 4.7x-4.9x EBITDA
SpartanNash Co. has a market capitalization of $675-704 million. If we assume a net debt of $466 million, the enterprise value equals more than $1.1 billion. With an EBITDA of $234 million, SpartanNash trades at 4.7x-4.9x EBITDA, which I believe is not justifiable. We are talking about a company that reports sales growth of 9%-10%, positive EBITDA growth, and 2%-4% EBITDA margin. In the past, most of the company's competitors traded at 6x-7.8x 2020 EBITDA. With this in mind, in my opinion, SpartanNash has an upside potential at 4.7x-4.9x EBITDA:
Source: Duff & Phelps
Source: Duff & Phelps
I think that shareholders will most likely believe that SpartanNash Co. is cheap. Institutional money managers Truist Financial Corp., the Canada Pension Plan, and Jane Street are among the company's institutional investors. Hence, certain institutional investors also believe that the company represents a good buying opportunity.
Amazon Bought Warrants Of SpartanNash
Amazon owns close to 2.5% of the company's total share count. Both companies signed a commercial agreement. I believe that this is quite interesting information for two reasons. First, the fact that a large company like Amazon bought stock warrants means that SpartanNash's business model is attractive enough to interest large players like Amazon. In addition, it means that Amazon believes in the long-term business plan of SpartanNash. In my view, many institutional investors will have a look at the company's financial statements, thanks to the agreement with Amazon:
Source: 10-K
In March, Insiders Bought Shares
In March, EVP Chief Financial Officer Mark Shamber, SVP CIO Arif Dar, and President and CEO Tony B Sarsam bought the equity of SPTN. Besides, in the last 12 months, most insiders acquired shares of the company. The number of insider sales is limited. I believe that the buyers of the stock will like this fact:
Source: NASDAQ
Risks
SpartanNash Company expects to continue its M&A activity in the near future. There are some risks when large corporations acquire smaller players. If the merger integration is not properly done, cost synergies may not materialize. In addition, the company could not find ideal acquisition players:
Part of the Company's growth strategy involves selected acquisitions of additional distribution operations, and to a lesser extent, retail grocery stores. Given the recent consolidation activity and limited number of potential acquisition targets within the food industry, the Company may not be able to identify suitable targets for acquisition and may make acquisitions which do not achieve the desired level of profitability or sales. Source: 10-K
SpartanNash reports a significant amount of goodwill and intangible assets. If the company has to execute asset impairments, I expect that its total amount of assets would decline. As a result, it is very likely that the share price would decline:
Testing goodwill and other assets for impairment requires management to make significant estimates about the Company's future performance, cash flows, and other assumptions that can be affected by potential changes in economic, industry or market conditions, business operations, competition, or - for goodwill - the Company's stock price and market capitalization. Source: 10-k
If the interest rates increase, I expect the company to deliver less net income. That's another relevant risk that shareholders need to take into account. SpartanNash has disclosed the interest rates risk in the annual report:
A hypothetical 0.50% increase in rates applicable to borrowings under the Revolving Credit Facility as of January 2, 2021 would increase interest expense related to such debt by approximately $2.2 million per year. Source: 10-K
Conclusion
SpartanNash Company trades at less than 5x EBITDA. The company is paying its debt, and Amazon recently decided to acquire a position. With all this in mind and the food industry trading at median EV/EBITDA of 6x-7.8x, I believe that there is an upside potential in the stock price. In my opinion, once investors get to know the company's most recent financial results, SpartanNash will most likely trade a bit higher. Besides, if the company continues to make good acquisitions, the total valuation of the company will most likely increase. In summary, this is a stock to be followed carefully.
This article was written by
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Comments (10)
The fully diluted shares outstanding count, on the other hand, includes diluting securities, such as warrants, capital notes or convertibles.
