Weis Markets Stock: Still Undervalued By 19.4% (NYSE:WMK)

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Background

Founded in 1912, Weis Markets, Inc. (NYSE:WMK) owns around 195 grocery stores in Pennsylvania, Maryland, New York, New Jersey, and Maryland. It offers a variety of customer loyalty programs to its customers, such as the “Weis Club Preferred Shopper Program.” Its revenues tend to be higher during holidays, but it is not a seasonal business. More than 55% of the revenues are generated through groceries, dairy products, frozen foods, beer and wine, and general merchandise items, such as health and beauty care and household products. An additional 30% of the revenues are generated by meats, seafood, fresh produce, floral, deli products, prepared foods, and bakery products.

Macroeconomic Backdrop

In this section we evaluate some macroeconomic factors that may make WMK an attractive investment during the recent market correction.

According to CNBC, the biggest worry on the minds of business owners is inflation. A majority of business owners are being forced to raise prices for consumers to combat their high own high costs. However, at the same time they have mixed feelings about how consumers will respond to the price increases because the overall consumer sentiment is low. To combat inflation, Fed has been announcing interest rate increases, which has led to the market giving back its gains post COVID-19.

Given the dynamics described above, it is easy to see that the overall economy is contracting. Although it is very difficult to predict whether the changes will lead to a recession, it is easy to see that investors in the stock market will likely to position themselves into defensive stocks and sectors in the short term.

WMK is classified as a defensive stock because it is a grocery store, which are considered consumer staples.

Company Fundamentals

Looking at the company balance sheet below, we see that WMK has maintained a very volatile cash position historically. In 2017, the company had $48 million in cash. The cash nearly tripled by 2020 to $137 million. But by 2021, it dropped to $86 million in 2021. The total assets increased from $1.4 Billion to $1.9 billion in 2021. The overall shareholder equity increased from $993 million in 2017 to 1.2 billion in 2021.

WMK Balance Sheet

Balance Sheet

Looking at the company income statements, we see that the revenue increased from $3.5 billion in 2017 to $4.2 billion in 2021. The company’s EBITDA has increased faster, going from $162 million in 2017 to $246 million in 2021 because the revenue increases have outpaced the cost of goods sold and SG&A expenses.

WMK Income Statement

Income Statement

Company Valuation

The company management does not provide any guidance in terms of its future revenues or EBITDA. It may be assumed that the company will continue to deliver a historically stable long-term growth rate of 1% to 2%. We also assume that the revenue growth rate will be between 2% to 8%, which is conservative given that in some years, WMK revenue has grown as much as 16% (2021). Inputting these factors into the discounted cashflow model, we see that this stock still has around 20% upside left.

DCF Model

Fair Price

WMK Revenue Projections

Revenue Projections

Investment Risks and Competitor Comparison

WMK does pay a dividend, therefore, it is important to consider developing the company valuation based on the dividend discount model. We see that if the market recovers quickly and growth stocks start to be valued higher, WMK may have a downside risk low dividend yield relative to the stock price. Based on the model shown below, the fair price for WMK is $59.1 per share, which is 29.8% lower than it’s current price.

WMK Investment Risks

Investment Risk Evaluation

Another way to evaluate the downside risk is based on using P/E multiples relative to the companies within the industry. WMK trades on 20.8 times trailing P/E and 19.8 times forward P/E multiple. This is higher than the median value of 13.3 to 14.4 times P/E for the same industry. Based on the projected after-tax profit of $122 million for 2022, we see that the fair market value for the company is between $53.84 per share and $65.09 per share.

Peer Comparison

Peer Comparison

Conclusion

Given the economic contraction and market volatility, WMK offers a flight-to-safety style return profile for investors. It is a defensive stock, which still has a 19.4% upside based on its historic growth. Investors should consider a long investment into WMK to counteract the recessionary macroeconomic backdrop.

Female owner checking inventory at store

Portra/E+ via Getty Images



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