AMCON DISTRIBUTING CO DIT
October 03, 2010 - 4:03pm EST by
shoon1022
2010 2011
Price: 61.50 EPS $11.94 $0.00
Shares Out. (in M): 1 P/E 5.2x 0.0x
Market Cap (in $M): 36 P/FCF 3.7x 0.0x
Net Debt (in $M): 33 EBIT 16 0
TEV ($): 69 TEV/EBIT 4.7x 0.0x

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Description

Amcon (DIT) is a company with an inexpensive valuation in a decent industry, and has an excellent CEO at the helm.  I believe the share price could be considered fairly valued in the $90+ range (approximately a 50% gain).  Unfortunately, there are no catalysts to unlock this value, and liquidity is poor.  For those reasons, I think this is an investment that should be considered for a longer term time horizon as I believe dividends will be the ultimate way to monetize the investment.

 

Here is a description of Amcon from their 10k:

 

 

COMPANY OVERVIEW

 

AMCON Distributing Company was incorporated in Delaware in 1986 and our common stock is listed on NYSE Amex Equities (formerly the American Stock Exchange) under the symbol "DIT." The Company operates two business segments:

 

 

 

Our wholesale distribution segment distributes consumer products in the Central and Rocky Mountain regions of the United States.

 

 

Our retail health food segment operates thirteen health food retail stores located throughout the Midwest and Florida.

 

WHOLESALE DISTRIBUTION SEGMENT

 

ADC serves approximately 4,200 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. In November 2008, Convenience Store News ranked ADC as the eighth (8th) largest convenience store distributor in the United States based on annual sales.

 

ADC distributes approximately 14,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food service products.

 

ADC operates five distribution centers located in Illinois, Missouri, Nebraska, North Dakota and South Dakota. These distribution centers, combined with two cross-dock facilities, contain a total of approximately 487,000 square feet of floor space. ADC's principal suppliers include Philip Morris USA, RJ Reynolds Tobacco, Proctor & Gamble, Hershey, Mars, Quaker, and Nabisco. ADC also markets private label lines of tobacco, snuff, water, candy products, batteries, film, and other products. ADC does not maintain any long-term purchase contracts with these suppliers.

 

RETAIL HEALTH FOOD SEGMENT

 

The Company's retail health food stores, which are operated as Chamberlin's Market & Café ("Chamberlin's" or "CNF") and Akin's Natural Foods Market ("Akin's" or "ANF"), carry over 30,000 different national and regionally branded and private label products. These products include high-quality natural, organic, and specialty foods consisting of produce, baked goods, frozen foods, nutritional supplements, personal care items, and general merchandise. Chamberlin's, which was first established in 1935, operates six stores in and around Orlando, Florida. Akin's, which was also established in 1935, has a total of seven locations in Oklahoma, Nebraska, Missouri, and Kansas.

 

The retail health food industry has significantly grown over the past decade as the demand for non-processed natural products (pesticide-free, hormone-free, and non-genetically modified) has grown. We believe this growth is attributable to a number of factors, including:

 

 

 

heightened awareness about the role that food and nutrition play in long-term health,

 

 

increasing concerns over food safety due to the presence of pesticide residues, growth hormones, and artificial ingredients found in foods purchased through traditional retail outlets,

 

 

growing focus on the impact of chemical additives included in consumer products such as household cleaning agents,

 

 

an aging population with a desire to maintain good health and quality of life.

 

 

 

Clancy wrote Amcon up on VIC in December '05 when the company was working on it's disposition of Trinity Springs, a money losing division which was masking the distribution and health food segments' profitability.  The disposition was finalized in 2009, and now Amcon is a steady and boring business which should produce 10mm of cash from operations annually with cap-ex somewhere around 1mm.  More importantly, the current CEO Chris Atayan understands finance and is a good capital allocator.  He is very straightforward and open, and is willing to discuss his thought process on why he'll choose to buy back shares vs pay a dividend vs use cash for new acquisitions.  From our discussions, I'm overpay for acquisitions although ultimately he does see potential growth opportunities via acquisition.  He put his money where his mouth was, as well, albeit at a lower price ($38.84):

 

 

On July 2, 2009, Mr. Atayan announced that he acquired 102,964 shares of
common stock and 20,000 shares of series A convertible preferred from William
Wright, the founder of 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" added Atayan.

 

Their credit agreement expires in June 2011 and I think Amcon will try to remove the restriction on dividends, which currently has a cap of $0.72/year.  While I don't think they will raise dividends initially, I would expect the payout ratio to be 50%+ over the longer term, assuming Mr. Atayan is unable to find better opportunities.  But over the last year, Amcon bought a distributor with 60mm in sales for $3mm, and also, opened a new store for their health food segment.  If the economy stays depressed, it's likely that more acquisition opportunities will present themselves, and cheaper leases will mean more new store openings.

 

While I think you could get to higher valuations by doing a sum of the parts valuation (because the health food has a higher growth rate, better margins, and subsequently I think you could make the case for a higher valuation), I'll choose to go down the more conservative path by valuing the whole company together.  I'm also doing this because 1) it's simpler and 2) I don't a strong opinion on the growth rate of the health food segment because it's such a small base of stores, and very little transactional history over the last few years to calibrate with. 

 

That said, DIT produces 10mm of cash annually, and spends 1mm on cap-ex, for a free cash figure of 9mm per year.  I think you could value that at 10x which gets you to an EV of 100mm.  Using 100mm EV, fully diluted shares outstanding, 750k, and 33mm of debt, gets you to a share price of $90/share.  Given the small float, trying to pin down an exact price target is even more ridiculous than in other equities, but I think ~$90 seems appropriate.  If you were to use a P/E based approach, I think you can arrive at much higher numbers, but I think the better metric in this case is the more conservative one.

 

As I'm reading my writeup, I realize it has zero sex appeal, so I'll apologize for the dry write up but I think it's fitting for this company - it's a boring, steady company with an intelligent CEO.  In five years, I think you'll see a company with minimal debt, steady cash flow, much of that being paid out in dividends, and the balance of the capital being deployed for bolt on acquisitions.

 

Risks:

The main risks to this thesis, in my opinion, are:

 

1)      Surge in gas prices (it's one of the company's main costs)

2)      Lower volume of cigarettes (cigarettes make up 70% of the company's sales)

 

Additionally, while it's not a risk necessarily, the stock has a low float and minimal liquidity.  Depending on your aversion to low liquidity, you'll have to apply a "liquidity discount" to price targets.

 

Catalyst

Value as it's own catalyst.
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    Description

    Amcon (DIT) is a company with an inexpensive valuation in a decent industry, and has an excellent CEO at the helm.  I believe the share price could be considered fairly valued in the $90+ range (approximately a 50% gain).  Unfortunately, there are no catalysts to unlock this value, and liquidity is poor.  For those reasons, I think this is an investment that should be considered for a longer term time horizon as I believe dividends will be the ultimate way to monetize the investment.

     

    Here is a description of Amcon from their 10k:

     

     

    COMPANY OVERVIEW

     

    AMCON Distributing Company was incorporated in Delaware in 1986 and our common stock is listed on NYSE Amex Equities (formerly the American Stock Exchange) under the symbol "DIT." The Company operates two business segments:

     

     

     

    Our wholesale distribution segment distributes consumer products in the Central and Rocky Mountain regions of the United States.

     

     

    Our retail health food segment operates thirteen health food retail stores located throughout the Midwest and Florida.

     

    WHOLESALE DISTRIBUTION SEGMENT

     

    ADC serves approximately 4,200 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. In November 2008, Convenience Store News ranked ADC as the eighth (8th) largest convenience store distributor in the United States based on annual sales.

     

    ADC distributes approximately 14,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food service products.

     

    ADC operates five distribution centers located in Illinois, Missouri, Nebraska, North Dakota and South Dakota. These distribution centers, combined with two cross-dock facilities, contain a total of approximately 487,000 square feet of floor space. ADC's principal suppliers include Philip Morris USA, RJ Reynolds Tobacco, Proctor & Gamble, Hershey, Mars, Quaker, and Nabisco. ADC also markets private label lines of tobacco, snuff, water, candy products, batteries, film, and other products. ADC does not maintain any long-term purchase contracts with these suppliers.

     

    RETAIL HEALTH FOOD SEGMENT

     

    The Company's retail health food stores, which are operated as Chamberlin's Market & Café ("Chamberlin's" or "CNF") and Akin's Natural Foods Market ("Akin's" or "ANF"), carry over 30,000 different national and regionally branded and private label products. These products include high-quality natural, organic, and specialty foods consisting of produce, baked goods, frozen foods, nutritional supplements, personal care items, and general merchandise. Chamberlin's, which was first established in 1935, operates six stores in and around Orlando, Florida. Akin's, which was also established in 1935, has a total of seven locations in Oklahoma, Nebraska, Missouri, and Kansas.

     

    The retail health food industry has significantly grown over the past decade as the demand for non-processed natural products (pesticide-free, hormone-free, and non-genetically modified) has grown. We believe this growth is attributable to a number of factors, including:

     

     

     

    heightened awareness about the role that food and nutrition play in long-term health,

     

     

    increasing concerns over food safety due to the presence of pesticide residues, growth hormones, and artificial ingredients found in foods purchased through traditional retail outlets,

     

     

    growing focus on the impact of chemical additives included in consumer products such as household cleaning agents,

     

     

    an aging population with a desire to maintain good health and quality of life.

     

     

     

    Clancy wrote Amcon up on VIC in December '05 when the company was working on it's disposition of Trinity Springs, a money losing division which was masking the distribution and health food segments' profitability.  The disposition was finalized in 2009, and now Amcon is a steady and boring business which should produce 10mm of cash from operations annually with cap-ex somewhere around 1mm.  More importantly, the current CEO Chris Atayan understands finance and is a good capital allocator.  He is very straightforward and open, and is willing to discuss his thought process on why he'll choose to buy back shares vs pay a dividend vs use cash for new acquisitions.  From our discussions, I'm overpay for acquisitions although ultimately he does see potential growth opportunities via acquisition.  He put his money where his mouth was, as well, albeit at a lower price ($38.84):

     

     

    On July 2, 2009, Mr. Atayan announced that he acquired 102,964 shares of
    common stock and 20,000 shares of series A convertible preferred from William
    Wright, the founder of 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" added Atayan.

     

    Their credit agreement expires in June 2011 and I think Amcon will try to remove the restriction on dividends, which currently has a cap of $0.72/year.  While I don't think they will raise dividends initially, I would expect the payout ratio to be 50%+ over the longer term, assuming Mr. Atayan is unable to find better opportunities.  But over the last year, Amcon bought a distributor with 60mm in sales for $3mm, and also, opened a new store for their health food segment.  If the economy stays depressed, it's likely that more acquisition opportunities will present themselves, and cheaper leases will mean more new store openings.

     

    While I think you could get to higher valuations by doing a sum of the parts valuation (because the health food has a higher growth rate, better margins, and subsequently I think you could make the case for a higher valuation), I'll choose to go down the more conservative path by valuing the whole company together.  I'm also doing this because 1) it's simpler and 2) I don't a strong opinion on the growth rate of the health food segment because it's such a small base of stores, and very little transactional history over the last few years to calibrate with. 

     

    That said, DIT produces 10mm of cash annually, and spends 1mm on cap-ex, for a free cash figure of 9mm per year.  I think you could value that at 10x which gets you to an EV of 100mm.  Using 100mm EV, fully diluted shares outstanding, 750k, and 33mm of debt, gets you to a share price of $90/share.  Given the small float, trying to pin down an exact price target is even more ridiculous than in other equities, but I think ~$90 seems appropriate.  If you were to use a P/E based approach, I think you can arrive at much higher numbers, but I think the better metric in this case is the more conservative one.

     

    As I'm reading my writeup, I realize it has zero sex appeal, so I'll apologize for the dry write up but I think it's fitting for this company - it's a boring, steady company with an intelligent CEO.  In five years, I think you'll see a company with minimal debt, steady cash flow, much of that being paid out in dividends, and the balance of the capital being deployed for bolt on acquisitions.

     

    Risks:

    The main risks to this thesis, in my opinion, are:

     

    1)      Surge in gas prices (it's one of the company's main costs)

    2)      Lower volume of cigarettes (cigarettes make up 70% of the company's sales)

     

    Additionally, while it's not a risk necessarily, the stock has a low float and minimal liquidity.  Depending on your aversion to low liquidity, you'll have to apply a "liquidity discount" to price targets.

     

    Catalyst

    Value as it's own catalyst.

    Messages


    Subjectstill cheap
    Entry10/12/2010 01:52 PM
    Memberclancy836
    Nice writeup. I was actually going to repost this one recently, but was foiled by the new prohibition on own-idea reposts. As you point out since my initial post the fundamentals are a lot better, with Trinity Springs disposed of, Akin's/Chamberlin's nicely profitable, and all the businesses generating a growing stream of income and cash flow. I agree that value is its own catalyst, but it doesn't hurt to have a private equity CEO like Chris Atayan who is presumably focused on maximizing his IRR by delivering a lot of value in a reasonably short time frame. If you have talked to Chris, do you have any insight on whether he is considering a sale of one/both of the businesses or what his exit strategy is? The distributing arm is a cash cow and very dominant within the region it serves; the service area would dovetail perfectly with an acquirer like CoreMark.
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