DIT - Amcon distribution co.

[LC]

Amcon is a convenience store distributor (cigarettes, beverages, candy, etc) in the middle-US. They also operate a few (15 total) health food stores in Florida, Oklahoma, Nebraska, Missouri, and Kansas.

 

They are the ninth largest convenience store distributor nationwide. Do they offer anything special? Not really. But for 46 million you're buying a business with stable operations, minimally capital intensive, paying down debt, and paying a small dividend.

 

Inventory turned 28.5x in 2012. They average about 26 turns/year over the past 10 yrs.

 

10 years of financials tell the story: http://www.gurufocus.com/financials/DIT

 

And shareholder letter for mgmt's vision: http://www.amcon.com//Portals/0/Documents/AnnualLetters/2012.pdf

 

 

This is a small, simple company that I think the newer and/or less professional members (like, say, myself!) might be interested in valuing.

 

LC

[DTEJD1997]

I've owned this several times in the past.

 

I think it is at a historically HIGH valuation at this point...

 

It is a reasonably run company in a very difficult business.

 

They might have some hidden value in the real estate that they own.

 

I also think that they have a lot of equipment (racking, pallet jacks, pallets) that is still in service, but has been fully depreciated.  So the cost to build this company out, would certainly be MORE than current book value.

 

I first bought it after they got rid of the bottled water operation.  I think it was $14/share?  I was alerted to it by VIC.  Had the lowest P/S metric I had ever seen at the time....It was selling for well less than 2% of sales.

 

Word on the street is that their health food operations have expanded significantly...

 

It would be interesting to see if they could grow this out, both in number of locations AND perhaps making the stores more than just vitamins, something akin to Whole Foods or "Fresh Market".  That might be wishing a bit much....but they already have a distribution system, could they bolt on more fresh food?

 

The other "word on the street" is that CORE has been looking at taking them out.  It would be a good mesh...at least in terms of geographic areas.

 

I watch this company quite a bit, but at these prices I would be more inclined to sell than to buy.

 

My thoughts are that it could get hit hard if they have any "hiccups" OR if the economy goes into the ditch again....

 

 

[mcliu]

Interesting that people here's looked at this. I basically had the same thoughts as DTEJD1997 after looking through the company's financials a couple of months ago. Valuation is pretty steep given the tough market that the company operates in. I think you should look at the price on an enterprise basis including all the debt/preferred shares.

 

That said, the CEO has done an excellent job turning the company around.

[Packer16]

This one has been on my radar but haven't pulled the trigger as other bargains were closer to my competence. One item that may have a big impact on this and most other retail or firms who hire alot of entry level staff with no health insurance is the effect of Obamacare.  We had a distribution client who had a study done by his insurance agent and they found that profitability would decline by 25% to either pay the fine or buy the cheapest of the Obamacare policies.  In these low margin commodity businesses where they have no way to pass on the increased costs, it will eat into profits. 

 

Packer

[no_free_lunch]

It is worth noting that the CEO holds somewhere between 25-40% of shares outstanding (different sources have different numbers, too lazy to figure out which is right).  He took over in 2006 and engineered a fairly incredible turnaround.  If you read the shareholder letter and look at the change in book value (from $9 to $67) he both talks and walks like a true buffet disciple.

 

That being said, the wholesale business is a commodity.  The retail is a bit better, has potential, but I am not crazy about it.

 

In regards to obama-care, I am not sure it won't be passed on.  Where I live there was a fairly sudden spike in wages and the minimum went up 33% in about 3 years.  Now it just costs a little more for everything.  I think the retail outlets at least will be able to pass this on, it might take a touch longer for the wholesale busines

 

This is a tough one, definitely going on my radar.

[Packer16]

I agree Obamacare costs will be passed on in non-commodity businesses but isn't the definition of a commodity business that you have no pricing power and very little ability to pass on cost increases?

 

Packer

[no_free_lunch]

The way I look at it, if it affects amcon and the competitors more or less equally, then the cost of the commodity goes up.  When the price of oil goes up, the price to fill my tank goes up as well, right?  It might not be a smooth process but ultimately everyone raises their prices.

[Packer16]

They either raise their prices or lower their profits or costs.  From the retail operations we have observed it is more likely profits will be hit until there is no more profit or costs will be cut.  The other alternative is to lay-off folks via automating their work to maintain profitability which is what may also occur.

 

Packer

[watsa_is_a_randian_hero]

I've owned this for a while now.  I like the company a lot, and think its an opportunity to get annualized returns of 15%+ per year over an extended period without excessive risk. 

 

I'm a big fan of the management here, I think they've done a great job boosting margins, opportunistically buying back stock, acquisitions, etc. 

 

I disagree with suggestions of some here that it is overvalued.  based on the multiples of coremark it would be a $125 stock.  I think it is worth somewhere between where its trading now and 125. 

[grym02]

I wrote about the stock on my blog awhile back and still hold shares. The CEO, Atayan, is the real deal IMHO, and has oversaw a pretty amazing turnaround since taking over - his shareholder letters are a must read. A few thoughts:

 

- The business throws off a lot of cash (~$75m in the last 6 years.) and Atayan has proven to be very adept at capital allocation.

 

- Acquisitions on the wholesale side make sense given the local economies of scale available in the business, and Atayan hasn't overpaid (last 2 acquisitions done at 4-6x pre-tax earnings, net of purchased inventory)

 

- Check out the ROA of Amcon's health food stores vs. Whole Foods. The company is squeezing a lot of profit out of a rather tiny footprint, and has plenty of room to expand the brand.

 

- On the valuation side, pegging DIT's normalized FCF at ~$10-12m per year results in a FCF yield to EV of 13-17%, not too shabby. Put another way, the business earns normalized ROIC of 12-13%, a percentage point or two above its cost of capital (squeezing out excess profit due to its local advantage), and therefore is worth 1-1.1x invested capital. IC ~$98m vs. EV of $72m.

 

- Incentives are aligned. Atayan had this to say after purchasing his stake in the company: “This is a significant personal investment for my family and reflects my confidence in the management team of our company and the strong relationships we have with our vendors and customers.”

 

Overall, I don't think the market will ever give it a proper multiple but will eventually be sold (CORE, McLane)

 

-Adam

[watsa_is_a_randian_hero]

Overall, I don't think the market will ever give it a proper multiple but will eventually be sold

 

+1

 

I am basically here for the ride; when the ceo is ready to sell, I will also sell.

 

[Shane]

These guys have paper thin margins.  Can anyone comment on the maintenance capex?  Is depreciation over-stated in any way?  Being a small fry in their line of business I worry that a little bit of pressure from a larger player puts them out of business, might be easier to do that than to buy them.

[mcliu]

I've owned this for a while now.  I like the company a lot, and think its an opportunity to get annualized returns of 15%+ per year over an extended period without excessive risk. 

 

I'm a big fan of the management here, I think they've done a great job boosting margins, opportunistically buying back stock, acquisitions, etc. 

 

I disagree with suggestions of some here that it is overvalued.  based on the multiples of coremark it would be a $125 stock.  I think it is worth somewhere between where its trading now and 125.

 

This is really a scale/efficiency business given the margins so you can't comp it to guys like Coremark or McLane since they have a lot more economies of scale.

 

This is more like a Safeway compared to a Wal-Mart.

[no_free_lunch]

The one thing I can't figure out is why do the margins keep shrinking?  I mean in 2009, they had about $12 / diluted share in earnings, now it's maybe $8-9.  Anyone have a feel for how low that will go, assuming the economy doesn't nose-dive?

[Green King]

The one thing I can't figure out is why do the margins keep shrinking?  I mean in 2009, they had about $12 / diluted share in earnings, now it's maybe $8-9.  Anyone have a feel for how low that will go, assuming the economy doesn't nose-dive?

 

I've looked at it I thought the decline is one taxes on tobacco and the other timing with their cash in terms purchasing things.

 

I don't know how to figure out taxes in tobacco so I passed. anyone out there that knows please enlighten me.

[grym02]

I've owned this for a while now.  I like the company a lot, and think its an opportunity to get annualized returns of 15%+ per year over an extended period without excessive risk. 

 

I'm a big fan of the management here, I think they've done a great job boosting margins, opportunistically buying back stock, acquisitions, etc. 

 

I disagree with suggestions of some here that it is overvalued.  based on the multiples of coremark it would be a $125 stock.  I think it is worth somewhere between where its trading now and 125.

 

This is really a scale/efficiency business given the margins so you can't comp it to guys like Coremark or McLane since they have a lot more economies of scale.

 

This is more like a Safeway compared to a Wal-Mart.

 

Why can't it be comped to CORE? CORE's gross margins have also shrank over the last 5 years (7.9-8% - > 6.9%). Although DIT is smaller, it has achieved enough economies of scale to earn returns above its cost of capital (although some of this is definitely from the more attractive health food business).

 

But compare CORE's operating margins to DIT over the last 5 years:

 

CORE OM % 2008-2012:

0.66%

1.31%

0.60%

0.79%

0.85%

Median: 0.79%

 

DIT OM % 2008-2012 (Wholesale only)*:

1.04%

1.45%

1.28%

1.28%

0.98%

Median: 1.28%

 

*Assumes 87% of corporate expenses assigned to Wholesale, which is consistent with the segment's % of total assets

 

Seems like DIT is a better run operation (at least since Atayan took over).

[crastogi]

I bought some Nov 2012, and plan to hold

[Shane]

Could be an interesting buy if the margin had room to expand.  Has the move to health stores been responsible for the improvement in margin?  Or was it the result of better operations on the distributing side?

[watsa_is_a_randian_hero]

I've owned this for a while now.  I like the company a lot, and think its an opportunity to get annualized returns of 15%+ per year over an extended period without excessive risk. 

 

I'm a big fan of the management here, I think they've done a great job boosting margins, opportunistically buying back stock, acquisitions, etc. 

 

I disagree with suggestions of some here that it is overvalued.  based on the multiples of coremark it would be a $125 stock.  I think it is worth somewhere between where its trading now and 125.

 

This is really a scale/efficiency business given the margins so you can't comp it to guys like Coremark or McLane since they have a lot more economies of scale.

 

This is more like a Safeway compared to a Wal-Mart.

 

True coremark is larger...but is it more efficient?  DIT's margins have been significantly larger than Coremarks in each of the last 5 years. 

[mcliu]

I've owned this for a while now.  I like the company a lot, and think its an opportunity to get annualized returns of 15%+ per year over an extended period without excessive risk. 

 

I'm a big fan of the management here, I think they've done a great job boosting margins, opportunistically buying back stock, acquisitions, etc. 

 

I disagree with suggestions of some here that it is overvalued.  based on the multiples of coremark it would be a $125 stock.  I think it is worth somewhere between where its trading now and 125.

 

This is really a scale/efficiency business given the margins so you can't comp it to guys like Coremark or McLane since they have a lot more economies of scale.

 

This is more like a Safeway compared to a Wal-Mart.

 

True coremark is larger...but is it more efficient?  DIT's margins have been significantly larger than Coremarks in each of the last 5 years.

 

Don't you have to factor in the company's ability to protect it's higher margins? The whole reason margins are mean-reverting is that higher margins attract competitors over the long-run.

 

Perhaps, Amcon has built up an impenetrable niche within its geographic region that somehow other players (with significantly more resources) cannot penetrate, if that's the case, I would say you're right and the company deserves a significantly higher multiple. On the other hand, perhaps, these higher margins will attract competitors into the market and pressure margins down over the next 5 years. I don't know enough to evaluate this though. Some insight would be appreciated.

 

There's probably something I'm missing, but on the surface, this whole distribution industry is driven by efficiency. So you're automatically at an advantage with greater scale as a result of purchasing power and distribution synergies. So by that logic, it seems obvious that the larger incumbents have an advantage when it comes to defending their margins.

 

Another thought, when you comp it against a single company like Coremark, the other question is whether the market is undervaluing DIT or overvaluing CORE.

[watsa_is_a_randian_hero]

Don't you have to factor in the company's ability to protect it's higher margins? The whole reason margins are mean-reverting is that higher margins attract competitors over the long-run.

 

yes, but that wasn't the question at hand.  The statement was a response to the claim that Amcon did not have the scale/efficiency that larger players had. 

 

Another thought, when you comp it against a single company like Coremark, the other question is whether the market is undervaluing DIT or overvaluing CORE.

 

this could be resolved with a long short.  the end result would still be a long on DIT though.  (I am not short CORE though). 

[mcliu]

Don't you have to factor in the company's ability to protect it's higher margins? The whole reason margins are mean-reverting is that higher margins attract competitors over the long-run.

 

yes, but that wasn't the question at hand.  The statement was a response to the claim that Amcon did not have the scale/efficiency that larger players had. 

 

Another thought, when you comp it against a single company like Coremark, the other question is whether the market is undervaluing DIT or overvaluing CORE.

 

this could be resolved with a long short.  the end result would still be a long on DIT though.  (I am not short CORE though).

 

I had actually meant to reply to asues comment about comping against CORE.

 

Since we're on this topic, why do you think it has the scale/efficiency that larger players have despite being significantly smaller?

 

Long short could be the strategy, but what if CORE decides to enter DIT's market and just bleed it dry with their greater resources? I guess you can argue that DIT is so powerful that they'll crush any competitive advances that CORE makes or that if CORE wanted to make a move, they would have done it already.

 

However, the threat is nonetheless relevant, particularly, in an industry with low product differentiation and low margins, it's tough being a small player with the possibility of getting crushed by the elephants.

 

Obviously, if you choose to believe that Amcon is a just-as-good, if not a better company than Core, and that a few years of operating margins provide ample evidence, and you choose Coremark as a comp, then that's your subjective decision.

 

I feel that Amcon is in a tough industry for smaller players as a result of the market dynamics, and hence deserves a lower multiple than Coremark.

 

That said, this is based on my shallow readings on the industry and I have to admit, I'm not an expert by any means on this industry, and would appreciate any insights on the competitive dynamics of the industry.

[watsa_is_a_randian_hero]

Since we're on this topic, why do you think it has the scale/efficiency that larger players have despite being significantly smaller?

 

I don't think it has more scale.  Any company any size can become bloated and/or complacent.  DIT's profitability is directly related to the new management that came in a few years back.  It appears from the margins improvements Atayan is running DIT lean and he is hungry. 

 

 

I agree with you the multiple should be less than core's.  I said that in one of my other posts.  Nonetheless, I think the multiple should be higher than where it currently trades.  Atayan has proven himself as highly capable and DIT is a great risk/reward proposition.

[eggbriar]

I bought some of this awhile back, but I couldn't get comfortable with the dilution and compensation, so I sold it.

 

Does anyone else have a problem with these issues?

 

In 2010, the top 4 executives took over $6m in total comp vs $8.7m in net income

 

In 2012, it was less, around $3m total comp vs $7.1m in net

 

Market cap per yahoo finance is $48.78m

 

Edit:  I guess I should add that in 2010, Atayan's total comp was about $4.6m of the $6M

 

 

[no_free_lunch]

You bring up a good point eggbriar.  That is my general issue with these micro-caps.  Executive compensation just takes up too much of a small pie.

 

I would also add the declining margins, that is my main issue with the company.  In spite of making acquisitions, and growing, why do profits fall each year?