Core-Mark Holding Inc. (CORE) October 13, 2008
Starting the Analysis A few questions we will ask • What do they do? • Do they have any protection from competitors? • What is their capital structure? • Does the management have the shareholders in mind? • What long term results should we expect? • What is the intrinsic value of the company? • Does the price give us a good margin of safety?
What do they do? • Founded in 1888 as Glaser Brothers • Sold to Fleming Companies in 2002 for $400 m • Fleming went bankrupt (not because of CORE) • Core-Mark distributes food, beverages and cigarettes to convenience stores • Primarily in the West and Canada • $5.5 B in revenues • 21,000 customers • Second largest only to McLane • Aquired Klein Candy in 2006 in PA (#6)
NACS Data • National Association of Convenience Stores • 145,000 stores nationally in 2007 • 120,000 stores in 2000 • 4-8% growth in the industry (# of Stores) • $150 Bil. Market • Cigarettes make up 1/3 of sales • 2,500 sq/ft 3,500 SKUs 10 parking spots
Risks • Slowing Cigarette sales -2.5% CAGR BUT prices have been upped to keep up revenues. • High gas prices may hurt sales BUT so far the only real effect has been a decrease in gas purchases • Slowing Economy • Competition
Competitive Dynamics Difficult for someone to just startup into the distribution industry • Scale is important, you need full trucks (route density) • 50/50 Mom and Pop stores and Chains • Large accounts (Valero, Mapco, Circle K) • Merchandise planning services • Impractical for most manufacturers to distribute (there are exceptions Coke, etc.)
Balance Sheet • Very Little risk here • Most assets are inventory, cash and receivables • Debt less than 2 times equity • Pretty Conservative Balance Sheet
Management • CEO owns 2% about $4 mil…this is a good amount • Company Insiders own another 8% • Several funds also own stakes Third Point (10.2%), Loeb (7.5%), Wynnefield (6.3%)
Vendor Consolidation Initiative • Delivering fresh products • 10% of the market • Will give them an even better competitive position • Could add as much as $1 Billion in Revenue • Higher Margin (15-25%)
Going Forward • Industry Growth 4-8% • VCI would add 3-4% • Could go Private • Could acquire a competitor
Valuation • In 2007 had $28 mil in FCF • At 10x that gives a price of $280 mil. • And this is a growing business…. • And safe from competition…. • 10x seems like a fair price given the growth and safety • Recently acquired Auburn Merchandise Distributors hard to get a good FCF but revenues increased by about $170 million so far this year
Valuation • So with estimating the FCF at around $30-32mil a low price for CORE would be about $300 million • Additionally we are not including any of the acquisition income going forward • Lets have a look….
So what does this mean? • The company is possibly worth $300 mill. But is selling for $214. • A 33% discount • It is near the bottom of its 52 wk range • We were conservative • It is trading near its tangible book value • A good margin of safety • Could yield good results over the coming years if VCI is successful
Remember • This is only a basic valuation • We could do a DCF that would give us better results for this business • Companies with this growth trade much higher typically (20x EPS) • Fair price for a great business • Do your own analysis…. Does it make sense to you? If not, don’t invest!