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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?
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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!
