In my opinion, you need to re-evaluate your thesis. Their HQ (loss of credit card processing) and DC (flooding, looting, and a small fire) were materially impacted, while Milkco was trucking in water to keep operations going. Unfortunately, this natural disaster has impacted them far more than their competition due to the concentration of their supply chain in the Asheville region. At a minimum, this event reduces the $1.2 billion valuation gap you calculated and introduces additional uncertainty into earnings expectations in the near-to-intermediate term.
You published this article AFTER the hurricane, and now your comments indicate you are brushing off an event that materially impacted their core operations. A good reminder to everyone: do your own due diligence.
I was able to open the Twitter link, but for some reason the Lancaster Farming link is not available to people outside the US, so I can't see it.
I am not brushing off the hurricane. It was serious and negatively impacted Ingles.
At this stage we are uncertain about how much of the damage will be covered by insurance, if indeed the natural catastrophe was insured.
But this raises another interesting dynamic in my mind. The investment thesis was predicated on the carrying value of real estate on the balance sheet being materially below its market value. Until now, Ingles had no incentive to revalue its real estate assets and so the distorted perspective presented in the balance sheet persisted. However, when making an insurance claim, the value of the asset will be assessed. Once it is known the company will be obliged to reflect that known valuation in their accounts. So, oddly enough, the hurricane could in fact be the catalyst that everyone has been waiting for to unlock the trapped value in this business.
Admittedly, the risk profile of this investment thesis changed with the hurricane. It was researched and written prior to the event, but published just afterwards (bad timing). However, if the thesis was correct, and the business was up to 70% undervalued, even if the hurricane has eroded the discount to 50%, does that mean that the thesis is invalid?
My analysis is not a recommendation to buy or sell any asset. It is simply a presentation of a business, with thoughts about why it might be interesting, intended to be a starting point for others to formulate their own opinions.
Do your own due diligence. Make your own decision. Seek professional advice. But don't vent frustration at someone simply putting an idea on the table.
You wrote: “Given this attitude towards external shareholders this adds further support to the argument that more buy-backs are likely. By reducing equity finance within the business, Bobby is removing external shareholder for whom he has no time, which may lead to eventual privatization. Such a move would make sense given the stock’s current undervaluation and could unlock significant value in the process.”
One concern: If external ownership becomes too small could the family force other share holders to sell at an unfair price or take the company private and make it hard for small shareholders to continue to benefit from ownership? This might not be a reasonable concern, but I have no idea how this kind of thing works- please enlighten me.
In the circumstances being discussed, the company could buy back shares at the market price. As they buy back more and more shares, the market price will rise due to contracting supply and greater demand. Minority shareholders cannot be forced to sell, and so those that hold on to their shares benefit from the upward pressure on the share price.
If the majority wanted to buy the business outright, and offered what shareholders considered to be an unfair price, dissenting minority shareholders have the right to have their shares independently appraised and bought out at fair value.
There are very strict laws and regulations in place to prevent majority shareholders from taking actions that are adversely prejudicial to the rights of minority shareholders. There is an overarching legal principle of equal treatment which requires that all shareholders be treated fairly and equally. This prevents majority shareholders from enriching themselves at the expense of minority shareholders.
The Securities and Exchange Commission are the regulator for public companies, but legal remedies are also available through the Courts. Many jurisdictions provide remedies for minority shareholders who are subject to oppressive or unfairly prejudicial conduct by controlling shareholders. This can include court-ordered buyouts or even dissolution of the company in extreme cases.
Majority shareholders and the directors/officers of the company (here they are the same people) owe fiduciary duties to all shareholders, including:
>> 1/ Duty of care - making informed business decisions
>> 2/ Duty of loyalty - avoiding conflicts of interest and self-dealing
Minority shareholders can bring lawsuits against directors/officers who breach these duties.
Hurricane Helene did have an impact. Unprecedented flooding led to loss of road and transportation infrastructure, hampering deliveries to stores and the company's credit card processing system was damaged, forcing many stores to accept only cash and checks, etc.
The company has been working closely with local officials, vendors, and power companies to regain normal operations and delivery to stores.
But when a hurricane strikes it doesn't only impact one grocery store. All of Ingles competitors in the affected areas faced the same issues and challenges. More particularly, customers still need to eat. They still need groceries. They don't stop buying. As such, Ingles is not at any particular competitive disadvantage and it will recover.
I can't find any information about insurance cover in respect of Ingles, but for a company such as this with multiple stores across many states, it is usually better to self insure as they have the diversification to spread their risk. It is cheaper than paying a third party insurer. So the chances are that Ingles and other grocery stores will have CAPEX associated with reparation work, but this is a blip on what remains an excellent business with durable long-term earnings.
With net debt/EBITDA at only 0.6x, Ingles is arguably better placed to weather the storm than many of its competitors so this may be a good thing for Ingles. When catastrophe strikes, either environmental or economic, the weaker operators in the industry die off and the strongest emerge stronger with more market share. It is the principle of survival of the fittest in an economic context.
Could be a wonderful buying opportunity. This is not investment advice. Please make your own decisions. But if the stock was only valued at a fraction of its intrinsic value and it is down on sentiment about an external one-time weather event, does that make it better or worse for a long term investor?
I know you are based in the UK so you may not be aware of just how badly the hurricane has damaged areas and will disrupt operations for a company based in Asheville / Western Carolina. The price action suggests the market is pricing this in.
My understanding is that because the HQ in Asheville was impacted and the area is still suffering power outages all Ingles stores across the southeast are currently unable to process credit or debit card transactions.
There was also damage to their distribution center.
If you are able to provide any more detail, I would be grateful.
Well...their distribution center that supplies most of the stores was heavily damaged, like you said. It's also highly likely their warehouse was looted so expect some inventory write-offs. No idea how they are going to restock shelves...They are self-insured so not sure how that is going to play out either. Lastly, the value of some of their real estate is probably permanently impaired now.
https://twitter.com/OddDiligence/status/1841910119946133659
https://www.lancasterfarming.com/farming-news/news/east-coast-farmers-coordinate-contribute-to-hurricane-helene-recovery/article_805e2ee8-85b1-11ef-b21c-57490d28dcb7.html
In my opinion, you need to re-evaluate your thesis. Their HQ (loss of credit card processing) and DC (flooding, looting, and a small fire) were materially impacted, while Milkco was trucking in water to keep operations going. Unfortunately, this natural disaster has impacted them far more than their competition due to the concentration of their supply chain in the Asheville region. At a minimum, this event reduces the $1.2 billion valuation gap you calculated and introduces additional uncertainty into earnings expectations in the near-to-intermediate term.
You published this article AFTER the hurricane, and now your comments indicate you are brushing off an event that materially impacted their core operations. A good reminder to everyone: do your own due diligence.
Thank you for your comment.
I was able to open the Twitter link, but for some reason the Lancaster Farming link is not available to people outside the US, so I can't see it.
I am not brushing off the hurricane. It was serious and negatively impacted Ingles.
At this stage we are uncertain about how much of the damage will be covered by insurance, if indeed the natural catastrophe was insured.
But this raises another interesting dynamic in my mind. The investment thesis was predicated on the carrying value of real estate on the balance sheet being materially below its market value. Until now, Ingles had no incentive to revalue its real estate assets and so the distorted perspective presented in the balance sheet persisted. However, when making an insurance claim, the value of the asset will be assessed. Once it is known the company will be obliged to reflect that known valuation in their accounts. So, oddly enough, the hurricane could in fact be the catalyst that everyone has been waiting for to unlock the trapped value in this business.
Admittedly, the risk profile of this investment thesis changed with the hurricane. It was researched and written prior to the event, but published just afterwards (bad timing). However, if the thesis was correct, and the business was up to 70% undervalued, even if the hurricane has eroded the discount to 50%, does that mean that the thesis is invalid?
My analysis is not a recommendation to buy or sell any asset. It is simply a presentation of a business, with thoughts about why it might be interesting, intended to be a starting point for others to formulate their own opinions.
Do your own due diligence. Make your own decision. Seek professional advice. But don't vent frustration at someone simply putting an idea on the table.
You wrote: “Given this attitude towards external shareholders this adds further support to the argument that more buy-backs are likely. By reducing equity finance within the business, Bobby is removing external shareholder for whom he has no time, which may lead to eventual privatization. Such a move would make sense given the stock’s current undervaluation and could unlock significant value in the process.”
One concern: If external ownership becomes too small could the family force other share holders to sell at an unfair price or take the company private and make it hard for small shareholders to continue to benefit from ownership? This might not be a reasonable concern, but I have no idea how this kind of thing works- please enlighten me.
In the circumstances being discussed, the company could buy back shares at the market price. As they buy back more and more shares, the market price will rise due to contracting supply and greater demand. Minority shareholders cannot be forced to sell, and so those that hold on to their shares benefit from the upward pressure on the share price.
If the majority wanted to buy the business outright, and offered what shareholders considered to be an unfair price, dissenting minority shareholders have the right to have their shares independently appraised and bought out at fair value.
There are very strict laws and regulations in place to prevent majority shareholders from taking actions that are adversely prejudicial to the rights of minority shareholders. There is an overarching legal principle of equal treatment which requires that all shareholders be treated fairly and equally. This prevents majority shareholders from enriching themselves at the expense of minority shareholders.
The Securities and Exchange Commission are the regulator for public companies, but legal remedies are also available through the Courts. Many jurisdictions provide remedies for minority shareholders who are subject to oppressive or unfairly prejudicial conduct by controlling shareholders. This can include court-ordered buyouts or even dissolution of the company in extreme cases.
Majority shareholders and the directors/officers of the company (here they are the same people) owe fiduciary duties to all shareholders, including:
>> 1/ Duty of care - making informed business decisions
>> 2/ Duty of loyalty - avoiding conflicts of interest and self-dealing
Minority shareholders can bring lawsuits against directors/officers who breach these duties.
I hope that this helps.
Thank you for the explanation!
Nice write-up, James! Gwen Hofmeyr wrote a nice thesis as well a month ago. Take a look at it! https://www.linkedin.com/feed/update/urn:li:activity:7235195987453992960
I referenced Gwen in the post. She shared her analysis and inspired the post.
hurricane helene impact?
Hurricane Helene did have an impact. Unprecedented flooding led to loss of road and transportation infrastructure, hampering deliveries to stores and the company's credit card processing system was damaged, forcing many stores to accept only cash and checks, etc.
The company has been working closely with local officials, vendors, and power companies to regain normal operations and delivery to stores.
But when a hurricane strikes it doesn't only impact one grocery store. All of Ingles competitors in the affected areas faced the same issues and challenges. More particularly, customers still need to eat. They still need groceries. They don't stop buying. As such, Ingles is not at any particular competitive disadvantage and it will recover.
I can't find any information about insurance cover in respect of Ingles, but for a company such as this with multiple stores across many states, it is usually better to self insure as they have the diversification to spread their risk. It is cheaper than paying a third party insurer. So the chances are that Ingles and other grocery stores will have CAPEX associated with reparation work, but this is a blip on what remains an excellent business with durable long-term earnings.
With net debt/EBITDA at only 0.6x, Ingles is arguably better placed to weather the storm than many of its competitors so this may be a good thing for Ingles. When catastrophe strikes, either environmental or economic, the weaker operators in the industry die off and the strongest emerge stronger with more market share. It is the principle of survival of the fittest in an economic context.
-13% since hurricane hit asheville
Could be a wonderful buying opportunity. This is not investment advice. Please make your own decisions. But if the stock was only valued at a fraction of its intrinsic value and it is down on sentiment about an external one-time weather event, does that make it better or worse for a long term investor?
I know you are based in the UK so you may not be aware of just how badly the hurricane has damaged areas and will disrupt operations for a company based in Asheville / Western Carolina. The price action suggests the market is pricing this in.
Good to know. Thank you.
My understanding is that because the HQ in Asheville was impacted and the area is still suffering power outages all Ingles stores across the southeast are currently unable to process credit or debit card transactions.
There was also damage to their distribution center.
If you are able to provide any more detail, I would be grateful.
Well...their distribution center that supplies most of the stores was heavily damaged, like you said. It's also highly likely their warehouse was looted so expect some inventory write-offs. No idea how they are going to restock shelves...They are self-insured so not sure how that is going to play out either. Lastly, the value of some of their real estate is probably permanently impaired now.