Enterprise Value = $240 million
Operating Income = $20.8 million
EV/Operating Income = 11.52x
Price/Book = .99x
Earnings Yield = 5%
Price/Revenue = .25x
Debt/Equity = 33%
Village Super Market is a chain of grocery stores trading at book value and located primarily throughout New Jersey and with other locations in Pennsylvania, New York, and Maryland. The company has been operating since 1937.
They are a part of the chain where I buy most of groceries: Shop Rite. Peter Lynch advocated “buy what you know,” so I hope this works out for me.
The Shop Rite that I go to is owned by a different operator and not a part of Village, but Shop Rite is a well known grocery brand around New Jersey, Pennsylvania, Delaware, and Maryland.
Shop Rite is known throughout the region as having the best prices. I used to shop at one of their rivals and was able to reduce my grocery bill by 30% when I switched.
For the last few years, Village’s earnings and cash flow have been in decline. This is why the EV/EBIT multiple is higher than I typically pay and the earnings yield is lower.
However, the stock is cheap on a price/book basis in comparison to its history. It currently trades at book value. As recently as 2014, Village traded at 2x book value on a lower equity level. Back then, shareholder equity was around $250 million and it is $321 million today.
The decline in valuation has been during this period of declining operating income. It also experienced declines during the recent sell-off.
Why have earnings been in decline? I think this is due to the trend towards Americans eating out more. Recently, Americans spent more money eating out than they did buying groceries.
With the rise of COVID-19, this has now completely reversed and spending on groceries is surging. I suspect this is a trend that will continue. Americans will continue to purchase large orders of groceries to ensure that they have enough food if there is another lockdown.
I also think that Americans are likely to see the financial benefits of eating out less. During a time of recession and financial stress, they are going to gravitate more towards the grocery store than the restaurant.
Another factor that has been hurting Village is Costco. Personally, I used to exclusively shop at Shop Rite. In the last couple of years, I have bought more bulk items at Costco. I’ll buy things like bread and eggs at Shop Rite every week, and then make a monthly trip to Costco and load up on things like meat that I store in my freezer.
Lately, I stopped going to Costco completely. With the COVID-19 panic, Costco is so crowded that it isn’t worth the trouble. I’m willing to pay a little extra and just go to the grocery store and not have to deal with as insane of a crowd.
While I think the competition with Costco is likely to continue, I don’t think that they can replace the grocery store. For me, Costco is out of the way and is a bit more of an “event,” while going to my neighborhood grocery store is a quicker ordeal.
Additionally, I believe that COVID-19 is going to break the trend towards restaurant eating. I don’t think that Americans are going to go full-throttle back into their old routine.
Meanwhile, I suspect that grocery stores are about to experience a significant boost in sales and earnings, which should justify a higher multiple. Here is an image from my Shop Rite a couple weeks ago:
It seems to me like this kind of sales volume should justify a better multiple of sales and book value.
Moreover, no matter how bad this crisis gets, grocery stores are going to remain open. They’re as essential as you can get.
In short, Village is a company whose business has been positively affected by COVID-19 and yet it still trades at a very low multiple of sales and book value.
Additionally, even if this thesis is incorrect, the company has a strong and liquid balance sheet. Debt/equity is only 30%. They have $75 million of cash on hand. The Z-score shows a low probability of bankruptcy at 4.36. The Beneish M-Score shows a low probability of earnings manipulation at -3.5. I also take comfort in the company’s long 83 year history of operation.
This is a New Jersey stock, so it’s only appropriate that I post a New Jersey song from the Boss.
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