Tuesday, March 18, 2014

Investing Wholesale Food Distribution Earnings Growth

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Spartan Stores (SPTN - Trend Report) is the Bull of the Day on St. Patrick's Day, 2014. I selected SPTN not only because of its Zacks Rank #1 (Strong Buy) but also because I can work in plenty of "green" puns and musical references. This is, after all, the day for the Irish they are identified with the color green and plenty of music!

Forty Shades of Green

Johnny Cash had a wonderful hit back in the 60's with Forty Shades of Green ... not at all to be confused with the tawdry "50 Shades of Grey", or for that matter the few shades of green that Spartan Stores uses.

Company Description

Spartan Stores, Inc. operates as a grocery distributor and retailer principally in Michigan and Indiana. The operate 375 independent grocery stores and 97 corporate-owned stores, as well as offering approximately 3,900 private brand grocery and general merchandise items. The Retail segment operates 97 retail supermarkets in Michigan under the Glen's Markets, Family Fare Supermarkets, D&W Fresh Markets, VG's Food and Pharmacy, and Valu Land names - and I have a personal favorite Glen's that is located in Charlevoix MI. The company was founded in 1917 and is headquartered in Grand Rapids, Michigan.

4 Straight Beats

Over the last year, SPTN has delivered four straight beats. In surpassing the Zacks Consensus Estimate in each quarter, the market has no done the stock any favors. "You'd think she was queen of the land" with those beats that average a positive earnings surprise of 20%. But the market barely moved the stock, and in fact sent it lower two times in the sessions immediately following earnings report.

SPTN Sees Estimates Moving Higher

When I look at how the earnings estimates for SPTN I see a great story. The 2014 Zacks Consensus Estimate has moved from $1.46 in April of 2013 to $1.50 in September to $1.56 in January of 2014 and is now at $1.65. That is excellent growth indeed.

The Zacks Consensus Estimate for 2015 is also moving higher. Estimates were as low as $1.56 in July of 2014, but then moved into the $1.60 range and are now at $1.71. This sort of positive trend in earnings estimates is a major reason why the stock is a Zacks Rank #1 (Strong Buy).

When Irish folk like myself see a company that has beaten the estimates four times in a row and has earnings estimates growing throughout the year, we get thirsty for a swig from The Jug of Punch.

Pure Michigan

I am a Buckeye by birth-rite, so Spartan Green is only attractive to me on March 17. Only in the last few years have I begun to accept Michigan for a great state and not just the home of the hated Wolverines.

SPTN does have a concentration of stores in Michigan but its also present in other Midwest states like Minnesota, Nebraska and they have two Pick'N'Save stores in the Great State of Ohio - or as I call it the "Holy Ground".


The valuation for SPTN is more than reasonable, and is, in fact showing the company trading at a discount to most metrics when compared to the industry average. A 13x trailing PE compares very favorably to the 18x industry average, while a 14x forward PE still shows the stock trading at a steep discount compared the 18x forward PE for the industry average. A more conservative measure like Price to Book show the company trading at less than 50% of the industry average. The price to sales metric of 0.2x is also well below the 0.5x industry average.

A company with a valuation like this makes me think of how rare it is to find a stock like this. It's almost like a Unicorn.

The Chart

The price and consensus chart is a great tool developed by Zacks. It shows how the stock has acted as the Zacks Consensus Estimate moves over time. The chart of SPTN shows that while estimates trended lower in 2012, there was a nice turnaround though in 2013. What really catches your eye is the recent spike in the earnings estimates. Those that believe that earnings drive stocks prices would be wise to take a closer look at SPTN.

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