SpartanNash Stock: Still Convinced There’s Plenty of Upside Here (NASDAQ:SPTN)

Dear readers/followers,

You may remember my coverage of SpartanNash (Nasdaq: SBTN) a year or so ago. A reader recently inquired whether I had sold my stake in the company given the relatively negative trend we were seeing Visible. My answer to this question was a simple but firm “no.”

In this article, I’ll reveal to you why I don’t think the company is as lowly valued as the market is currently pricing it, why I think there’s a significant upside here, and why any valuation below 10x P/E, which by the way is where we are today, is at a point where I would… I say that the company can be bought with significant upside.

SpartanNash is small. At the current level, the company cannot manage more than a market capitalization of less than $700 million, making it one of these companies. Smaller US based stocks are in this category I cover. At 50% long-term debt to equity, it’s also not terribly low leverage, which is otherwise a fairly general and common thread for these companies.

But the upside given the company’s operations, still exists.

Let’s see what we have here and provide an update on this company.

SpartanNash – The upside is still there, despite everything

A fair question would be that given the company’s unflattering trend since my last article, which you can find here, if the uptrend I talked about at the time has ended here – which I would say it doesn’t, it doesn’t.

As I mentioned in previous articles, any investment you make in quality food production, logistics, or food-related services is not a negative in my book. These are sectors that, just like utilities and similar sectors, hold significant upside over time even if we are currently in an environment where these companies are valued less and less, due to increasing risk-free rates, increasing cost of debt, and generally inflation and rising costs. However, we need to be aware of the risks, and SpartanNash is not risk-free.

As I mentioned, and as the company has mentioned before, this business is in the midst of transformational change. Net margins collapsed, and the company had a lot of work to do. Relatively high leverage means interest cover is subpar for the sector, and there’s not a lot of cash on hand – 0.02x cash to debt as of my last article.

However, SpartanNash remains a strong player in two highly synergistic sectors – retail and wholesale – with significant turnover, as well as high TAM. You know, if you follow my work, that I don’t consider TAM a little more relevant to any business – but the sales here are impressive. Also, the company is forecasting some fairly strong sales and EBITDA growth numbers – and unlike other riskier companies, I don’t see these numbers as being unrealistic.

The upside in earnings and performance was further confirmed by quarterly sales in excess of $2.8 billion, a positive net earnings increase of 14.4% year over year, and flat EBITDA – somewhat lower, but at 2.4%. Only during company transformation. There is a slight improvement in net margin (actually more of a rounding error; don’t brag about a 7 basis point improvement when you’re a sub-$1 billion company), and Present Guidance for the full year looks like this.

That’s what I like to see – not declining sales, but the potential for improved EBITDA. This means that the company is focused on profit rather than on the top line — many companies are still very focused on that top line — including a food-related company I recently wrote about, HelloFresh SE.

It’s not that I consider the top line irrelevant, but it’s not relevant when the top line is all you have and your profit is negative. For too long, investors have accepted the argument that “with enough volume, there will be profit.”

If you don’t have over $1 billion in profit, you’ll probably never get there.

At the same time, SpartanNash’s transformation is leading the company in the right direction. From the lows during COVID-19 – which is understandable, given the company’s segments and segments – we are now heading toward $300 million in EBITDA.

And that’s with some fairly significant headwinds that SpartanNash has faced during this transition, including labor costs, logistics costs, food inflation, market demand volatility, and the like. However, the company still fulfills its strategic commitments.

The Company’s approach to capital allocation at this time remains very conservative. The ratio of CAPEX and IT to sales is about 1-2% – and that’s about it for now, given the state of the company. However, there is not much involved in paying off debt. The company considers a net debt/EBITDA of 2.4x good enough. I don’t agree with you, but this is something that can be discussed. Much more, 25% of capital, actually goes to shareholder returns – beaten only by CapEx. A very small portion goes into mergers and acquisitions.

To be completely honest with you, not much has changed since my last article about how I see the company and its long-term potential. It can be said that the company has not yet achieved the upward trend that some expected or hoped for, but the truth is that I never expected that they would be able to manage this rate so quickly.

My arguments for SpartanNash still revolve around core operations, which are complemented by quite a few of the company’s key advantages, including the military. SPTN continues to maintain its military sector, distributing dry groceries, frozen foods, beverages, and meat to U.S. military commissariats and exchanges. This is somewhat unique, as the company, along with third-party partner Coastal Pacific Food Distributors, is Delivery solution only To serve the Defense Commissioner Agency to this degree throughout the world.

That alone wouldn’t make this a “buy,” but complemented by the turnaround I see happening under the hood here, it’s enough to keep me invested with a well-covered yield of over 4.4%, and even potentially investing more.

Let me explain my assessment of the work in this state.

SpartanNash – The valuation is attractive with a P/E of $30 per share or more.

In my last article, I gave the company earnings of about $30 per share. The current forecast is for EPS to continue to decline marginally, and there is one analyst forecasting a double-digit EPS decline trend in 2026 – for which I couldn’t find any rationale outside of that target alone – so at this point, I’m not giving it much credit. Of credibility.

I’d also like to point out that more often than not SpartanNash either manages or beats its estimates on occasion – more than 75% of the time. (link to paid quick charts). Only about 20% actually err negatively with the MOE being around 20% on a two-year basis.

My argument is that a food service company like this with a proven track record, even one as small as this, should be worth at least 12 to 15 times its P/E multiple — especially if it can turn things around. It is important to point out here that I… We expect these things to turn around. If you don’t think this is the case, then this is probably not a good investment for you.

But if, like me, you see SpartanNash could turn around here, you could see upside of up to 40% annually through 2025E based on a P/E of just 15x, to an earnings point of about $32 per share. That’s above $30 per share, so in my opinion, the company doesn’t even need to manage that.

By my estimate, the company only needs to manage around $28-$29 or 13-13.5x P/E, giving us 30% per annum at this point. Certainly, the low growth estimated at this time and even lower this year could cause this company to trade sideways for a while – but that’s where patience comes in, and that’s why yield is so important when I invest. Not only do I want to earn my salary through capital appreciation, I also want “interest” on my money.

In this case, I get 4.43% interest by covering well under 60% of the returns, which is good for me to continue to take this risk, for the upside of the potential market-beating return.

As long as I don’t see any deterioration in this thesis, I will continue to invest this way and in this company. I don’t sell just because the company hasn’t reached its peak – I sell because the thesis fails.

The SpartanNash thesis is not broken.

What we have here is a company that is being penalized in the market due to macro inflation, inflation and constant shifting. It is absolutely correct to punish such a company. To that degree, I would consider that perhaps too much.

The risks here remain margin deterioration and conversion failure. Some goals and recovery have been “postponed” in terms of timing – but I don’t associate this with upside or that the turnaround will never come.

At this point, many investors are looking for refuge in high-value technology stocks. I do exactly the opposite. I try to find the lower value quality that plays a good positive role, because anyone who “promises” me to get their price up to four figures in no time, and anything that “sounds too good to be true” probably is. This doesn’t mean I don’t invest in technology, I do it successfully. But I’m very picky about how I invest in it.

At this point, I’d say SpartanNash is a continued “buy,” with the following thesis.

thesis

• The company now has a capitalization of $30 per share, which was also the previous PT. The main difference is that we are now approaching $20 per share, versus more than $30 per share as in my last article. Any operating company becomes attractive at the right price, and after a 40% decline, it’s time for SpartanNash to become attractive.
• The company is fundamentally attractive – here, I think you can actually start buying common shares in SpartanNash, and I’ve recently added more shares to my position in the company as well.
• I rate SPTN at $30 per share, with a “buy” rating at the current valuation. This represents a rating change for me for the company.
• I’ve looked at the current options market, but haven’t found anything attractive enough for me to invest in – although I will continue to research and update if a cash-secured position catches my eye.
• As of this article being updated in June 2024, I am keeping an eye on the final price and may add to the company in the future.

Remember, all I care about is:

• Buy undervalued companies – even if that devaluation is minor rather than staggeringly massive – at a discount, allowing them to normalize over time and reap capital gains and dividends in the meantime.
• If the company goes beyond normalization and goes into overvaluation, I take the gains and roll my position into other undervalued stocks, repeating #1.
• If a company is not overvalued but is hovering within fair value, or falling below its true value, I would buy more as time allows.
• I reinvest proceeds from dividends, savings from work, or other cash flows as defined in #1.

Below are my criteria and how the company meets them (Diagonal).

• This company is all about quality.
• This company is fundamentally safe/conservative and well managed.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/retracement.

I consider the company cheap and there is an upside here, and for this reason, I will hold my thesis at “buy” here.