Ingles Markets: Consecutive Strong Quarters, 40% EPS Growth, 8.9x P/E

Summary

• March Quarter +40% YoY EPS, +16.3% YoY net sales.
• 8.9x P/E on FY2022 estimates.
• 65% of Ingles' total assets are backed by real estate holdings.
• Our target price of $120 represents a 27% upside potential.
• Stock has already appreciated 169% since our initial recommendation.

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Another Strong Quarter

Ingles Markets (NASDAQ:IMKTA) reported their second quarter results for the quarter ended March [the company operates on a September fiscal year end]. The company had another strong fiscal second quarter, with EPS increasing by 40% YoY. The company's net sales increased by 16.3% YoY to $1.38 billion. Gross profit increased by 12.3% YoY, but gross margin fell by 100 basis points compared to the same quarter last year. In comparison to the same period last year, operating expenses have climbed by 7.5%. Higher personnel costs, which reflect a tight labor market, accounted for the majority of the increase. Net revenue was also boosted by lower interest expenses, which were down 12.9% YoY. Overall, net income was up 31.4% YoY to $68.6 million. Grocers today are having to contend with inflation, labor shortages and the continuing effects of the COVID-19 pandemic has affected operations. Simultaneously, the company has also benefited from stay at home measures due to uncertainties of COVID-19.

Ingles Markets reported $34.1 million in capital expenditures during the first half of 2022, down from $69.4 million in the first half of 2021. The regional grocer ended the first half of 2022 with 198 supermarkets in six states, the same as the previous year. North Carolina has 74 stores, Georgia has 66, South Carolina has 35, and Tennessee has 21 stores, while Virginia and Alabama each have one. The grocery and drugstore chain also has 111 in-store pharmacies and 107 gas stations.

Robert P. Ingle II, Ingles Markets' Chairman of the Board, commented:

We are pleased with our strong results due to the dedication and hard work from our associates. We continue to work hard to provide affordable products and selection to our customers during these challenging times.

Price Target & Valuation

We have maintained a valuation EPS of $10.62 and $11.90 on FY09/2022e and FY09/2023e, respectively, and a P/E estimate of 11.3x. Multiplying the EPS of $10.62 with our P/E of 11.3x, we arrive at our unchanged price target of $120.00 which represents 27% upside.

The company is relatively inexpensive as it is trading at 6.9x P/E, compared peer companies which are trading at a 19.3x average P/E.

Bloomberg

Real estate value; 1.8x Price-to-Book

Ingles owns 162 out of the 198 supermarkets outright, which are either free-standing stores or anchor tenants in owned shopping centers. This suggests substantial real estate worth, which makes this organization appealing to outsiders due to the concealed asset value. The company also has 21 undeveloped plots that could be developed by the company or a third party into a free-standing store. The stock is selling at 1.8x price-to-book in FY21, with a stated book value per share of $51.7.

65% of Ingles' Total Assets are Backed by Real-estate Holdings

As we have stated in our previous notes, the majority of Ingles' land and owned properties are in highly desirable real estate markets such as North Carolina, South Carolina, and Georgia. For the previous 30 years, the corporation has depreciated its properties using the straight-line method. While this is reasonable, the value of building real estate has unquestionably increased over time, especially in Ingles' locations. So, real estate can be used as collateral for debt and then sold to pay off the obligation.

While we don't have a precise marked-to-market real estate value [based on corporate disclosures], we wouldn't be surprised if the current value is as much as 2x the declared book value. This gives a more accurate view of Ingles' property value. The corporation has understated its book value, in our judgement, because land appreciation has not been included. We checked through the footnotes of their Annual Report and found no revised marked-to-market real estate valuation. As a result, we have reason to believe that their land value has increased significantly since its acquisition date.

Demand Coping up with Rising Inflation

Consumers are continuing to cut back on non-essentials while inflation remains at 40-year highs. Inflation in the United States topped 8.5% last month, the highest 12-month rate since 1981, as a spike in gasoline prices linked to Russia's invasion of Ukraine compounded significant increases resulting from the collision of strong demand and persistent pandemic-related supply shortages. In March, an index of food prices increased 8.8% over the previous year, as farmers and grocers passed on rising fertilizer, transportation, and other input costs in their supply chains. However, recent study shows that, in addition to increased food prices, cooking and grocery shopping are also on the rise.

Recession-Resistant

The supermarket industry is recession-resistant, implying that even when the economy is weak, consumers would continue to buy groceries and food.

Conclusion

Ingles had a good March quarter, with excellent EPS and revenue growth. With a P/E of 8.9x, the company is undervalued. We believe the EPS is sustainable, despite being pandemic-induced on some levels. Given this assumption, we expect EPS to remain strong in the coming fiscal year, resulting in a 27% price increase from current levels.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.