Founded in 1986, Amcon Distributing (DIT) is one of largest wholesale distributors in U.S. serving 5,000 retail outlets including convenience stores, grocery stores, liquor stores, drug stores and tobacco shops. Amcon operates in 23 states and distributes over 14,000 different products, although cigarettes represent 70% of sales. The company is the 9th largest c-store distributor in the U.S. Amcon also operates 14 retail natural food stores which constitutes about 20% of profits and is fairly stable -- but the primary driver is the distribution business.
Why is a "sleepy" business like Amcon interesting? Chris Atayan, a former private equity professional, took over as CEO in early 2006. He invested $6.5 million via common and preferred (owns 35% of common) to help shore up the balance sheet. During his six-year tenure, the following has transpired:
Net debt has declined from $60mm to $20mm.
FCF ~ $50mm, or 84% of current Enterprise Value.
EPS has been $9 to $10 per year.
ROEs have been 15% or higher each of the past six years.
Annual dividend of $0.72/share and some modest share repurchase.
The company has continued to make sensible bolt-on acquisitions to build density (and establish a presence in the Southeastern U.S.)
Despite all of these accomplishments, and a non-promotional CEO who writes logical annual letters stressing conservative risk-adjusted returns, Amcon finds its stock price selling for less than 1.1x Tangible Book Value per share despite a 6-year record of increasing TBV significantly (from $-20.94 to $66.79 per share). It also finds its P/B selling for approximately 0.8x, the first time P/B has been below 1.0x since 2005 (BVPS has grown from $-3.31 to $85.64 per share over this time period).
Average P/B since 2007 is 1.3x. If Amcon simply reflected average P/B levels, the stock should be selling for $107 per share, or 51% higher -- and this ignores future BVPS creation (which has been growing sharply). The stock is not covered by Wall Street and is thinly traded. However, the business is fairly moat like in that over two-thirds of customers are mom and pop c-store operators that are very loyal (and Amcon's margins are only 1.2% to 1.5% so customers don't feel as though Amcon is getting rich).
As with many wholesale distribution businesses, DIT operates with a very low gross margin (~7%) and a very lean cost structure, with EBITDA margins hovering around 1.0% - 2.0% of sales.
Low inventory risk. Turns inventory 45x+ per year, or every 8 days. Quick turns = inflation hedge.
Low A/R risk. Turns A/R 35x+ per year, or every 10 days – does not provide long terms to customers.
Liquid, high quality assets. A/R + inventory = 70% of assets. PP&E = 15%. Intangibles only 12%.
Route density is important due to 1) high cost of fuel and truck driver time dictates that distribution centers must be physically located near customers, 2) large numbers of small customers within a region, and 3) constraints placed on the quantity of goods that can be delivered by one truck.
National market leader is McLane, acquired by Berkshire in 2003 from Wal-Mart. Core-Mark (CORE) is the 2nd largest – services 21,000 locations (4x larger than DIT) – but mostly in Western U.S. and Canada. C-store distribution industry is typically characterized by regional duopolies, with McLane usually holding the greatest share among chain accounts, and with large regional players usually holding the greatest share among mom and pops and smaller chains. In many regional markets the number three player is a fraction of the size of the first and second largest players.
Convenience Store Industry
C-store industry continues to show long-term growth and demonstrate resiliency compared to the general economy.
148,000 c-stores in the U.S., up from 124,500 ten years ago (~1.0 to 2.0% annual growth).
$150 billion market at retail ($110 billion at wholesale).
Fragmented and dominated by single-store independent operators (63% of units). Only 18% are parts of chains of greater than 200 stores.
Cigarettes ~1/3 of sales. Alcohol is #2. Sodas is #3. Foodservice #4.
Essential fixture in America. Consumers refill gas, purchase soda, beer, cigarettes, groceries and snacks.
Most are small format boxes (~2,500 square feet of selling space with 3,500 SKUs and 10 parking spots).
Big oil companies were the historical owners of larger chains, but many have been exiting the business to focus on their core E&P operations.
Trends: consolidation, product diversification, reliance on technology.
Since 1981, U.S. cigarette consumption has declined fairly consistently at a CAGR of about 2.15%, and now stands about 45% below its peak.
In 1998 cigarette manufacturers became bound by the Master Settlement Agreement (the “MSA”), which added about $5 to the cost of a premium carton.
The trend towards lower consumption has been driven by the compounding effect of higher state and federal excise taxes, as well as better education about the adverse health implications of tobacco use. This trend will likely continue.
High gas prices (curbs discretionary spend at c-stores).
Cigarette manufacturers have regularly raised prices to offset the impact of lower volumes.
Shift in the channels where cigarettes are purchased. As cigarettes became more expensive, consumers began to purchase less frequently in bulk (cartons) and more frequently in single units (packs). Because the easiest way for consumers to buy a pack of cigarettes is through convenience stores (especially since vending machines disappeared), cigarette volume has moved out of the warehouse clubs and into the convenience channel.
In 1999, c-stores represented 54% of cigarette sales nationwide. This figure is now 63%.
Strong growth coming from fresher foods and in-store quick-service-restaurants.
Impractical for manufacturers to distribute directly to c-stores because most products lack sufficiently high margins to absorb the costs of delivering small batches to so many stores scattered throughout the country. Only Coke, Budweiser and Frito-lay have this ability.
This is why distributors like DIT have come to exist. With so many small stores, distributors have found that the most efficient means of distributing c-store goods is by using trucks to conduct regularly-scheduled milk runs out of a centrally located local or regional warehouse.
Many of these distributors, including CORE, service other channels in addition to c-stores (like liquor stores, mass merchant / drug stores, gift shops, etc.), but c-stores represent the vast majority of the business.
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