The U.S grocery store with massive hidden real estate
How some accounting logic has created an opportunity
The Secret
How does the following investment sound to you?
A simple, American small cap run by a certified owner operator which has never lost money in a year, has slowly grown intrinsic value over time, is solidly competitively advantaged, and that is selling for a 1/4th the property, plant, and equipment
Considering most solid but not fantastic American businesses still sell for multiple times their tangible assets, and 20 times earnings it should sound pretty good
This business is a family run southern grocery chain that is by no means a growth stock or an ultra-high-quality business, but has some very interesting information that not many people know about. It has overall low debt, moderate returns on assets for a grocery business, and slowly grows intrinsic value over time mainly by adding real estate and secondly by increasing earnings power. It has gotten reasonably good results over time despite the rise of Amazon, Walmart, and Costco. The name of the business is Ingles Markets (IMKTA). Here’s how it’s secretly selling for way less than the value of its real estate
(2024 10K)
Let me explain
Most grocery stores lease most of their locations versus buying the land. Ingles owns more of its land and buildings than any other grocery chain. It’s also helpful to know, most grocery chain’s sell for many multiples of book value.
Target sells for 3 times more than it’s tangible book value
Costco sells for 16 times it’s tangible book value
Kroger sells for 10 times it’s tangible book value
Ingles is on paper selling for a 23% less than its tangible book value as of writing. However, all of its real estate as you saw earlier is valued at cost and from all reports available has not been revalued. Ingles has held its land for decades. Over the past 30 years suburban retail commercial real estate (Ingles real estate) has appreciated multiple times over. Reasonably knowledgeable investors know that there is a difference between accounting numbers and the actual value or economic reality. Most of the time companies try to overstate their assets or earnings. In this case, Ingles massive amounts of land and property has been appreciating for years, two decades, or 3, 4, 5 decades, depending on when it was bought and it is all being valued on the balance sheet at cost. This means that the actual value Ingles could sell their real estate for is multiple times higher than what the balance sheet shows or what the market thinks. It also means a business that has never lost money in a year that is slowly growing is being valued in the most modest assumption less than 50% of its tangible assets versus the S&P 500 being valued at least over 5 times it’s tangible book value. I am going to explain the real hidden real estate further, but first I need to explain the business and management.
The Business
Ingles has been able to do pretty well despite the rise of its competition by buying up all the land in smallish retail areas usually containing 5-20 stores that are the closest to the nearest big source of population. Often times in small towns or suburbs and not in big bustling cities. They make a bit of money by leasing all the other real estate in the center to other businesses and ensure there is no competition close. Also, this leasing business is high margin and a slowly growing stream of cash. Their strategic real estate leaves them as the closest grocer to major sources of customers who their brand aligns with and makes the travel to the competition at least a couple miles away.
Ingles also offers groceries at a low cost due to the strategic positioning of their large distribution center and warehouse, in addition to their milkco plant which vertically integrates Ingles and provides them with low-cost dairy, juice, and tea. This plant also sells the majority of its total production to other businesses but still is able to supply Ingles with the large majority of its dairy, and some juice, tea, and water products. In addition, a big expense for grocery stores is the monthly lease and rent payments, but with its ownership of land and low debt Ingles has lower overhead expenses. The typical consumer’s grocery cart of Ingles goods was shown to be as cheap as almost any other grocer.
It’s not just their low prices and strategic real estate that have adapted them to survive against the Costco’s, Walmart’s, and Amazon’s. They have been making their stores bigger over time with more options, they have been increasing the amount of organic food and have implemented online pickup orders. In addition, they have been adding fuel stations, pharmacies, and Starbucks or “meal replacement” options like pizza, sandwiches, and prepared salads into their stores. The majority of their operating cash flow goes to buying more real estate and doing the upgrades stated to their stores. They also have been paying down debt and pay a small consistent dividend.
Ingles has only had 3 CEOs since inception in 1963. The first being Robert Ingle who founded the company and was the CEO until he passed away. The second being his son Robert Ingle the 2nd who served from 2011 to 2016. The current and third CEO being James Lanning who first started working at Ingles in 1975 as a service clerk. Robert Ingle the second still serves as the chairman on the board of directors and is significantly involved. I view this as a huge plus as family owned and operated companies do better on average. This is because they own a significant amount of the shares and do not just view the board position as a job to keep but are actually interested in the long-term results.
Ingles had a surge in profits during the inflationary period of 2022 largely due to the very profitable fuel sales they had. When a business like a grocery store even has a 3% change in net profit margin, it can create massive differences in earnings. Then as fuel prices moderated and labor costs increased Ingles’s return on equity and net profit returned to more usual levels. However, they suffered a lower-than-average ROE and net profit margin last year as they have significant operations in the Carolinas where Hurricane Helene (an exceptionally damaging hurricane to Asheville where Ingles headquarters is) caused multi week disruptions to operations and some minor impairments to property, plant, and equipment. Overall thought the effect on PPE was quite minor and the thesis is intact. I will caution management has guided that there will be impacts from the hurricane to their first quarter of 2025 as well, so one should be extra cautious of a 1-time big lump sum investment into Ingles before the full damage is known.
In addition to the land, Ingles from an earnings perspective is at an attractive forward price to earnings of 15. There are no earnings estimates or analysts following Ingles but given my best information and judgement 15 seems reasonable. Also, Ingles trailing P/E is 15. You might be asking how come someone else has not discovered the hidden value of Ingles? Well other people have, but not enough to bring it to the market’s attention and even if one discovers the hidden value of the real estate (and the stronger than first glance competitive position) it is very difficult to get an exact value of the real estate. It would take a team of real estate experts to actually value the real estate. However, the exact value is not necessary to the thesis, what is important is that the real estate is very likely worth multiple times more than the stated book value.
I would like to throw out for the bragging factor and cool rights that I originally discovered the hidden value on my own organically and I discovered it within a year of starting to learn about investing. I decided to research every U.S grocery store business around two years ago(I’ve done this with like 7 industries) and was looking into Ingles. While reading their 10K I realized that they A. Had a lot of land and B. Their accounting measured the value of the land at cost, and that they have rarely ever sold property. I did not have nearly a 1/4th the knowledge at that time that I know have and due to other factors, I did not pursue the idea strongly again until a couple months ago.
The PPE figures
Ingles leases a smallish number of stores that it operates, but the thesis is about the land they own, so that’s what these figures focus on. I got the following information from Ingles 10k’s and did my best with the information provided to build out the picture of their real estate
2003 10K: Ingles owns the 101,000 square foot milkco plant on 11.5 acres of land
Ingles owns 74 shopping centers with 58 of them containing an Ingles, 74 freestanding stores, and 4 undeveloped sites for a total of 152 sites
They have a 810,000 square foot warehouse, headquarters, and distribution center situated on 73 acres of land
2010 10K: Ingles owns their 118,000 square foot milkco plant on 20 acres
They own 70 shopping centers of which 58 include an Ingles, they own 93 additional free-standing Ingles, and 14 undeveloped sites for a total of 177 sites
They own an 810,000 square foot center that has their headquarters, warehouse, and distribution facility on 73 acres of land
They own a 139,000 Square foot warehouse on 21 acres of land
Ingles owns 46 acres of land adjacent to the warehouses for further expansion
2024 10K: Ingles owns their 140,000 square foot milkco plant on 20 acres
They own their 139,000 Square foot warehouse on 21 acres of land,
They own another distribution center/warehouse/headquarters of 1,649,000 square feet located on 119 acres.
Ingles owns 175 of its stores (breakdown between shopping centers versus freestanding not disclosed, but the amalgamation of a lot of research tells me it is highly likely more of them are a part of their shopping center strategy), and 29 undeveloped sites for a total of 204. The actual differences in land owned from 2010 is greater than the total 27 site gain because more of the total sites include whole shopping centers and the average store is larger.
(Notice the difference in average square feet per store over time)
The Conclusion
With the land and property figures laid out over 3 different intervals since 2003, we are able to get some working picture of the land’s average age. It seems that in the past 20ish years Ingles has doubled the headquarters and milkco land. In addition, it has probably increased the amount of land in shopping centers and Ingles stores by at least 50%. I got this number as the total site increase is already about 30% more, and Ingles has been increasing the average size of their stores for a while as well as buying up land in the small shopping centers over time. What we can see is that yes Ingles has added a significant amount of real estate in the past two decades, but Ingles already owned a substantial amount for at least two decades. A lot of the land that was owned in 2003 and still today owned was bought 3-6 decades ago. My best guess based on the data is that Ingles land is at the least on average 15 years old, and on the optimistic side 30 years old. I think the truth is somewhere in the middle here.
We will run 4 assumptions to attempt to gauge the hidden value of the land.
15 years of appreciation at 3% annually: 1.00=1.56
15 years of appreciation at 6% annually: 1.00=2.40
30 years of appreciation at 3% annually: 1.00=2.43
30 years of appreciation at 6% annually: 1.00=5.74
The range I really see for the tangible book value of Ingles is probably understated somewhere between 2 times and 5 times. My best guess is Ingles is currently selling for 1/4th of it’s tangible assets, and a forward PE of 13-16. This if true, given the general quality and stability of Ingles business would make Ingles a fantastic value investment.
That being said
Even though I have truly done my best to give a good estimate on the value of Ingles PPE, there is absolutely no guarantee on when if ever the value will be realized. Ingles will not get taken over ever (which would be awful if a business like Ingles where the management actually have built their lives on it got scraped for parts) as the Robert Ingle the second owns only 22% of the business, but 72% of the voting rights. He is going to take care of the business, so I do not ever see him selling land to do a special dividend and I think most would be buyers of Ingles would not care about it the way he would want. Unless there is an accounting change, or everyone absolutely blows this article up to the moon (which is a good idea if you ask me) the value of Ingles will not likely be recognized by the market for a long time. Management focuses on the business not the stock price. Ingles a long time ago stopped doing earnings calls, earnings estimates, or answering any questions from Wall Street.
They are truly a small southern country town business
That is secretly, incredibly cheap
Margin Of Wisdom
Please understand this is not personal financial advice as I do not know your needs, tolerances, or situation, but instead would encourage you to do your own due diligence on Ingles! If you thought the article was worth reading subscribe and please restack it.
For a Canadian grocery chain, Metro (MRU) also has ownership of most of its real estate.
Very interesting article! Never thought of factoring in the value of a grocery stores with their real estate property value and how much that affects the value of the grocery store.