Stock Ingles Markets Inc (IMKTA:NSQ): Analysis

Ingles Markets stock is listed on Nasdaq as "IMKTA". English Markets, simply called "ingles" is an American company active in the retail trade. It was founded almost 60 years ago in North Carolina and is currently present in almost 200 locations across six states in the southeastern United States. Since ingles' financial year ends at the end of September, we already have figures for this very special year 2020.

Profit explosion

One man's misfortune is another man's gain. chinese virus - it doesn't shock anyone when we say the English, South African, Brazilian or Japanese variant, so let me keep calling it that - has caused a surge in retail sales due to the closure of US schools and restaurants. Ingles has clearly benefited from this, with sales increasing by almost 10% in the past financial year, causing net profit to more than double.

Flat electrocardiogram for Ingles Markets stock

Most companies saw their fundamentals collapse in 2020, and yet at the same time their market capitalizations were soaring, boosted by massive aid from central banks and governments. Paradoxically, Ingles did exactly the opposite. While its results were exploding upwards, its stock price remained miserably flat or nearly so, hovering between $35 and $40 throughout the year.

Valorization

This countercyclical behavior has had the effect of making the stock particularly attractive, whereas it was already cheap before the pandemic. Its price is in fact:

• 4.8 times current recurring earnings
• 10 times earnings average recurring earnings
• 1 times book value and tangible assets
• 0.2 times sales
• 3.8 times current free cash flow
• 12.7 times average free cash flow

EBIT (and EBITDA) amounts to nearly 19% of the enterprise value, which confirms the fairly strong attractiveness of the stock. Similarly, the enterprise value represents only 6.4 times the current FCF. Once again, ingles seems really cheap. However, if we compare it to the average FCF, it climbs to 22 times this value. Let us recall that the enterprise value reflects the capital structure of the company. The fact that the valuation is less attractive using the EV suggests to us that the company has a fairly high net debt, which we will examine later. In addition, using the average FCF over five years weights the effect of the exceptional result of 2020, which gives a more realistic view of what ingles is capable of achieving in "normal" circumstances.

Ingles Markets Share Dividend

The North Carolina distributor is particularly cautious, if not stingy, when it comes to dividends. The yield thus amounts to a very modest 1.5%, which has been stagnant for several years. To illustrate how tight the board of directors is, let's compare what is distributed to shareholders compared to the money earned by the company. The dividend amounts to:

• 7.4% current profits
• 5.8% of current FCF
• 15.4% average profits
• 19.6% of average FCF

There is therefore substantial room for growth in distributions in the future, even if turnover returns to normal, and even if there is a more significant decline! It remains to be seen whether the money-grubbers will one day want to loosen their purse strings. Nothing could be less certain.

Trend of fundamentals

While the dividend and share price remain flat, earnings, asset values and cash reserves have been growing over the long term, proving the strength of the US retailer's business model. Looking back further, however, Ingles has managed to turn these good results into shareholder value, slightly beating the leading US index over the last twenty years.

Liquidity

Paradoxically, despite an excellent last financial year, Ingles Markets' liquidity is in sharp decline. While the current ratio was still 2 in 2019, it fell to 1.45 in 2020. Of course, this is still correct, but if we ignore inventories, which represent more than 3/4 of current assets, there is not much left. The quick ratio thus amounts to a very small 0.32, which is enough to raise some concerns. Fortunately, Corona is still here for a while and easy money should continue to fill the coffers of the American distributor for a few more months, allowing it to meet its current financial obligations.

Profitability & profitability

Unlike liquidity, profitability is improving, with a gross margin rising to 26%, for a free cash flow margin slightly lower than 5% and a net margin of 3.9%. Nothing extraordinary, of course, but let's remember that we are in the retail sector, which does not generally shine for its profitability. On the other hand, it is quite another thing for profitability, which is not only up sharply, but above all at a high level, with an ROA of nearly 10%, a CFROA of 18.4% and an ROE of nearly 22%! Although this can be explained by the record result of 2020, it is still quite exceptional for a chain of stores.

Debt

If the ROE is so high, it is obviously not only because of the very good results, but also because the denominator (equity) is relatively small. We had already mentioned this aspect of Ingles' capital structure when we discussed the enterprise value. It turns out that the North Carolina retailer has a fairly high long-term debt to asset ratio, at 30.9%. However, it should be noted that this ratio has significantly decreased compared to the previous financial year, when it was 45%! Even if the debt represents "only" 0.74 times equity, Ingles Markets would still need nine "normal" years to repay it with its free cash flow, which is a long time. Too long.

Shareholder return

The positive point is that the company has been regularizing its debt for three years now. We have seen the enormous effort that has been made compared to the previous financial year. Over the last five years, the repayment of net debt has thus represented an average annual return for the shareholder of 11.7%! This explains why the board of directors has remained particularly tight-fisted on the dividend, the cash having been used differently. Another positive point: Ingles Markets has not had to increase its capital to do so. The number of shares in circulation has thus remained stable over the last five years.

In total, the average annual return for the shareholder over the last five years, between the dividend and the repayment of the debt, amounts to a very appreciable 13.3%.

Risks with Ingles Markets stock

The American distributor, which mainly sells consumer goods, is fairly sheltered from economic crises. 2020 proved this by even having a boosting effect on the company's turnover. The daily volatility of the stock over the last twelve months was thus limited to 37%, which is certainly quite high in normal circumstances, but significantly less than most stocks during the same period. Similarly, the beta, at only 0.6, shows us that Ingles is particularly defensive in nature.

While the quick ratio of 0.32 may raise some concerns regarding liquidity, we can be reassured by a Z-Score (Altman) of 4 (green zone) and an F-Score (Piotroski) of 8 out of 9. Ingles Markets is not about to go bankrupt, it is financially solid, its fundamentals are improving and the price is likely to perform well in the future.

Conclusion

I have to say that Ingles Markets stock gives me pause. It is very rare to find quality stocks at an affordable price on the US market these days. In some respects it seems seriously undervalued, but if we take into account the enterprise value (taking into account debt) and the average results (so as not to be misled by an exceptionally good 2020 financial year), Ingles Markets is certainly attractive, but not an extraordinary opportunity either. A gain of 40% seems to me to be a fairly realistic objective. It is good, but it does not give a huge margin of safety either.

What ultimately bothers me the most is paradoxically not the company itself (apart from the debt), but rather what the market is doing with it. Despite exceptional results, the share price has not taken off. The momentum is bad. We can therefore wonder what will happen when Americans' lives return to normal, in particular thanks to the vaccine. Turnover will also return to normal, leading to a drop in profits. What will then be the reaction of the market and the very many institutional investors that are present in the capital of ingles, such as Vanguard, Dimensional Fund, BlackRock, SSgA, Goldman Sachs, etc.?