Value Play: Weis Markets (NYSE: WMK)

In 1895, my paternal great grandfather Louis Baer Finkelstein and his brother Harry opened the L.B. Finkelstein Model Dry Goods and Star Clothing House in Wellsboro Pennsylvania on the corner of Main Street and Crafton. The store fell victim to the Great Depression in 1933 and closed its doors, but every morning for more than 30 years my great grandfather would walk five minutes to work from his house at 54 Waln Street. His 1928 obituary characterized him as “one of Tioga County’s best known and highly esteemed business men” and his clothing store was the place to go to dress for success. Although not directly involved in the store’s daily operations, my great grandmother Rachel (“Ray”) was a beloved “first lady” of the Wellsboro business community, as reflected in the local newspaper’s 1942 obituary for her:

An Appreciation—

A popular, but mediocre poetess once wrote— ‘Politeness is to do and say, the kindest thing in the kindest way”. The words are trite, but the implied quality, is possessed by too few of us. Our friend and neighbor, Mrs. Finkelstein, had that attribute; kind words were heard by all who met her, but the kind deeds were known only to the recipients. There was nothing smug about her goodness; she had a tolerant understanding of the foibles of humanity, and a keen sense of humor, which was never spiced with malice. The good fortune life brought her was shared with others; the bad fortune was met with courage. She could tell even of broken bones, with a twinkle in her eye. In spirit and demeanor, Mrs. Finkelstein was a gentlewoman; what better tribute can one pay to her memory?”

Simply put, my great grandparents were good Republican, bridge-playing, garden-club member, freemason merchant folks who earned an honest day’s pay for an honest day’s work running a local family business. Such family-run businesses with a long-term passion for operational and financial excellence are my favorite type of small-cap stock investments.

Weis Markets is a Family-Run Grocery Store Chain that Cares About Its Local Community

On a much larger and more successful scale, the same can be said for this month’s Roadrunner Value Front Runner: Weis Markets, a grocery-store chain founded in 1912 by brothers Harry and Sigmund Weis in Sunbury Pennsylvania, which is only 85 miles southeast of Wellsboro. The company operates 163 retail food stores in Pennsylvania (including one in Wellsboro) and four surrounding states: Maryland, New Jersey, New York and West Virginia.

The company has only one business segment because it focuses on doing only one thing well: local grocery. Weis revenues are generated in its retail food stores from the sale of a wide variety of consumer products including groceries, dairy products, frozen foods, meats, seafood, fresh produce, floral, pharmacy services, deli products, prepared foods, bakery products, beer and wine, fuel, and general merchandise items, such as health and beauty care and household products.  Supporting its retail operations are a centrally-located distribution facility, its own transportation fleet, and three manufacturing facilities.

Chairman Emeritus is 95-year-old Yale alumnus Robert Weis, son of founder Harry. This past April, due to health reasons, Robert relinquished the Chairman of the Board role to his 47-year-old son, Yale alumnus and CEO Jonathan Weis, Harry’s grandson. A true family affair! The Weis family has 53.4% voting control of the company, with Robert Weis owning 47.8% and 91-year-old sister and Smith College alumna Ellen Weis Wasserman owning 6.5%.

Although I strongly favor companies with large percentages of insider ownership, majority control is more than ideal because it means takeover-proof veto control. On the other hand, if a family is ready to sell out, majority control makes the decision to sell quick and easy. Grocery store consolidation is the name of the game right now as competition heats up with Wal-Mart entering the “small store concept.” The competition is growing so fierce that The Great Atlantic & Pacific Tea Company (A&P) is on the brink of declaring bankruptcy. As one analyst describes the situation:

The scope of the war raging in the grocery industry is a war in which individual stores are little more than foot soldiers and the battlefields encompass entire regions of a state.

Grocery stores are no longer just competing with other grocery stores. Today’s competition is increasingly from big-box retailers such as Walmart (which now controls roughly 25 percent of the total grocery market in the United States) and from discount sellers such as dollar stores, which expanded aggressively into the food business during the Great Recession. Both non-traditional grocers also derive much of their profits from non-food items, which allows them to undercut the already thin margins of traditional grocers.

  The size of recent grocery store mergers has been increasing:

• January 2014: Kroger and Harris Teeter ($2.5 billion deal)
  
  
• January 2015: Albertsons and Safeway ($9.4 billion deal)
  
  
• June 2015 (announced): Netherlands-based Ahold (owner of Giant, Stop & Shop, and Peapod) and Belgium-based Delhaize (owner of Food Lion) ($29 billion deal)
  
  
• July 2015: Dollar Tree and Family Dollar ($9.1 billion deal)

The real game-changer is the recent merger announcement between Ahold and Delhaize. Although the joint company will only be the fourth-largest U.S. grocer and won’t dethrone second-largest Kroger (Wal-Mart is No. 1), it makes Kroger sweat in the mid-market “traditional” supermarket space and analysts speculate that Kroger needs more than Harris Teeter to continue dominating and therefore another large Kroger acquisition is in the works. Among the acquisition targets consistently mentioned is Weis Markets:

Weis Markets keeps a fairly low profile in the industry, but analysts say family-controlled companies become more likely to sell out to a larger player when a third generation of family assumes control.

Companies with families owning large stakes could make a deal very easy or shut it down, depending on their wishes.

Could Kroger pick up A&P “on the cheap” once it files for bankruptcy? Sure, but turning around a bankrupt operation would likely be very costly and could quickly transform a bargain acquisition into an expensive acquisition after all is said and done. As an S&P analyst puts it: Kroger may not want a fixer-upper. They like good assets that add something to their operations.”

Kroger Weis Chairman and CEO Jonathan Weis is third-generation family and he only became “interim” CEO after former CEO David Hepfinger resigned “abruptly” in September 2013. The “interim” designation was removed in February 2014, but I have lingering doubts that Jonathan Weis deserves or wants to be CEO over the long term.

(From my personal family history, children are not always as competent as the parents. My great grandfather L.B. Finkelstein made his son and my great uncle Harold Byron Finkelstein a junior partner of the Wellsboro clothing store in 1926 and let’s just say that management subsequently suffered, especially after L.B.’s death in 1928, resulting in the store going out of business in 1933. But I digress . . .)

Up until recently, 95-year-old Robert Weis has been opposed to selling out, but that may have changed as of June 2, 2015 when roughly half of his 47.8% ownership interest (22.6% to be exact) was transferred to a revocable trust controlled by wife Patricia and which gives son Jonathan the power “to vote and dispose of the shares.” The SEC filing says that Jonathan “does not presently have any plans or proposals which relate to or would result in a merger,” but plans can change quickly.

Whether or not a takeover occurs anytime soon, Weis Markets is a debt-free, profitable enterprise with strong community ties and innovative operations. Since at least 1995, the company has paid an increasing dividend that has never been cut, not even during the 2000-03 bear market or the 2008-09 financial crisis. The stock currently offers a sustainable and healthy 2.8% yield and steady, if not growing, profitability:

Weis Markets’ Solid Financials

Source: Morningstar

Based on these financials, it is clear that price competition from Wal-Mart and others has retarded growth, but Weis is fighting back successfully to remain relevant with refurbished stores, “buy local” procurement, preferred customer reward programs, community outreach, and environmentally-friendly sustainability initiatives. In May, for example, Weis purchased and deployed the energy intelligence software of EnerNOC in all 163 of its grocery stores, a move that will save the grocer hundreds of thousands of dollars each year. As the press release stated: “Energy expense management is essential in hyper-competitive industries like the grocery business.”

Bottom line, I’m convinced there is still plenty of room to thrive in the traditional grocery store space lodged between the low-end Wal-Mart shoppers and the high-end Whole Foods Market shoppers and Weis Markets is doing everything right to be a mid-level winner.

Valuation is reasonable at an enterprise value-to-EBITDA ratio of only 7.1 and both price-to-book and price-to-sales multiples equal to or below to their five-year averages. Weis is set to thrive as independent company, but the prospect of a takeover provides additional allure.

Weis Markets is a buy up to $50; I’m also adding the stock to my Value Portfolio.

Value Sell Alert

To make room for Weis Markets, Roadrunner is selling:

• Werner Enterprises (WERN)

In general, transportation stocks have lagged significantly behind industrial stocks during the first half of 2015 and North American trucking stocks are no exception, having fallen 17% through the end of June compared to gains of 4.3% for the Russell 2000 and 1.8% for the S&P 500.  Many analysts are puzzled by the trucking underperformance given that fuel costs remain low and freight demand remains high, but investors appear to be speculating that the good times won’t last because of weaker-than-expected GDP growth and a drop-off in  industrial production (led by the decline in the oil industry).

In May, long-haul trucking loads (i.e., shipments that traverse 1000 miles or more) fell 9.3%, the 33rd monthly decline in the last 34 months. Is the recent transportation underperformance the pause that refreshes or are transportation stocks a leading indicator of economic weakness that will soon take down other economically-sensitive stocks? Hard to say, but the economic uncertainty increases Werner’s risk profile and therefore Werner no long deserves one of only 20 spots in the Roadrunner Value Portfolio.

Werner Enterprises is being sold from the Value Portfolio.

Momentum Buy:

Concordia Healthcare (Nasdaq: CXRX)

Concordia Healthcare  is a Canadian healthcare company focused on acquiring and managing “legacy” pharmaceutical products (i.e., patent has expired) and “orphan” drugs (i.e., low volume, high price) that still have patent protection. Treatments focus on cancer, heart failure, lupus, and rheumatoid arthritis. Founded less than three years ago by Mark Thompson, a former executive at Biovail (now Valeant), the company has grown incredibly fast, with a market capitalization of approximately $30 million growing to almost $3 billion in two short years. On June 29th, Concordia’s stock started to trade on the Nasdaq, which provides much greater liquidity than its previous exclusive home on the Toronto Exchange. Canadian brokerage GMP Securities recently rated Concordia a buy, stating:

Over the past ten years, the US biotech  sector has, on average, outperformed the broader market by 950 basis points from June to September, by far its strongest seasonal period. Strong fundamentals, ongoing accretive M&A activity, the continued scarcity of earnings growth in the market (which the biotech sector can deliver), and favourable seasonals should result in a strong relative performance in a down market.

• Price gain between 12 months ago and 3 months ago = 124.85% (99th percentile)
• Price gain over the past 2 months =2.60%
• Price gain over the past month = 9.26%
• Roadrunner Momentum Rating: 124.85 – (2.60) – (3*9.26) = 94.47

Concordia Healthcare is a buy up to $81; I’m also adding the stock to my Momentum Portfolio.

Please Note: The chart below is priced in Canadian dollars (1 CAD = 0.79 USD) and is based on the stock’s “CXR.TO” ticker symbol that trades on the Toronto Exchange. I am recommending purchase of the stock on the Nasdaq with the ticker symbol “CXRX,” but I am using the Canadian price chart because it has a full year of price history whereas the Nasdaq price chart is only two days’ old. 

Momentum Sell Alert

To make room for the new momentum stock, Roadrunner will be selling the following price laggard: 

• The Greenbrier Companies (GBX)

One of the leading railcar manufacturers, The Greenbrier Companies has been hurt by delayed orders as the national debate over railcar safety standards caused confusion for rail car buyers. Some standards were deemed too difficult to achieve.  Investors worried sales of new cars would be held up while the debate dragged on. Towards the end of last year, the stock seemed to go off the rails but then bounce during the first half of 2015. With the release of disappointing third-quarter earnings, brokers have started to downgrade the stock on fears that oil prices will remain low and hurt demand for rail cars. The stock’s price rebound has petered out (i.e., momentum is gone). 

While I continue to be positive about Greenbrier’s ability to benefit from the railcar replacement cycle based on the new safety standards,  the regulatory situation remains fluid and the company could be hurt by both continued rail car buyer confusion and low oil prices. As with trucker Werner Enterprises, the uncertain economic situation for Greenbrier means that it’s time to move on to greener pastures.

The Greenbrier Companies is being sold from the Momentum Portfolio.