We came across a bullish thesis on Ingles Markets, Incorporated (IMKTA) on Rock and Turner Investment Analysis’ Substack by James Emanuel. In this article, we will summarize the bulls’ thesis on IMKTA. Ingles Markets, Incorporated (IMKTA)'s share was trading at $71.05 as of Nov 6th. IMKTA’s trailing P/E was 8.46 according to Yahoo Finance.
A grocery store employee stocking shelves with fresh fruits and vegetables.
Ingles Markets, Inc. (IMKTA), a regional supermarket chain with deep roots in the southeastern U.S., offers a unique investment opportunity due to its significant real estate assets and its conservative, family-led management. Founded in 1963 and headquartered in Asheville, North Carolina, Ingles operates 198 stores across six states, primarily in small towns and suburban areas where it has established a commanding market presence. While its name may cause some confusion, suggesting a potential Spanish origin, Ingles is purely American, and its management’s conservative, long-term focus has protected shareholders' interests for decades. This stability is reinforced by the Ingle family's substantial ownership stake, with CEO James W. Lanning and Chairman Bobby Ingle continuing to lead the business with a clear commitment to shareholder value.
One of Ingles’ strongest advantages lies in its vast real estate holdings, with 84.3% of the land and properties it occupies under company ownership. Unlike most grocery chains that lease their locations, Ingles has steadily acquired land and properties, particularly in areas where real estate values have appreciated. This substantial property portfolio is, however, undervalued on its balance sheet, obscuring the company’s true asset value. Additionally, Ingles has strategically acquired land around its stores to prevent competitors from entering the vicinity, which strengthens its market position and builds a land bank with potential for future development or monetization. Off-balance sheet holdings through subsidiaries like "Sky King" and "Shopping Center Financing II" also indicate that the company’s true property value far exceeds what’s reflected in financial statements. Estimates, including those from Folly Partners’ Gwen Hofmeyr, suggest that Ingles' real estate portfolio could add $657.7 million in hidden value beyond reported figures. This significant asset value creates an unusual net-net scenario, where the grocery business could essentially be valued at less than zero, a compelling opportunity for value-focused investors.
Ingles’ store positioning and branding give it a strong local advantage. Operating under both the primary “Ingles Markets” brand and a smaller “Sav-Mor” chain, it dominates in communities with limited competition from national chains, focusing on convenience, quality, and community engagement rather than aggressive price competition. Ingles has used this local dominance to weather inflationary pressures, maintaining and growing its margins even during challenging periods by passing on rising costs without hurting sales. This market position has allowed Ingles to maintain gross margins around 24% and operating margins near 3.5%. During the COVID-19 pandemic, for example, Ingles’ operating margins reached a peak of 6.8% as demand surged and efficiency increased due to reduced SG&A expenses.
A key part of Ingles’ operational success is its high level of vertical integration. The company operates a 1.65 million-square-foot distribution center in Asheville and owns a dairy processing subsidiary, Milkco, allowing it to supply more than half of its in-store products directly. This vertical integration has reduced supply chain risks and supported stable financial performance, which is especially important in the grocery business where margin pressures are constant. Ingles’ capital allocation has also been prudently managed, with a Net Debt/EBITDA ratio of only 0.66x and a conservative payout ratio of 7.7%, allowing it to maintain a stable dividend yield. Over the past ten years, the company has repurchased 20% of its shares, increasing shareholder value. Notably, Ingles has a strong history of financial discipline, having never posted a net loss in its history, and the family-led management team continues to prioritize stability and long-term growth over short-term gains.
Over the past decade, Ingles has strategically pivoted from aggressive expansion into real estate acquisitions. This shift has built an extensive portfolio of properties and shopping centers, many of which house Ingles stores alongside other tenants, generating a robust income stream from leasing that complements its grocery operations. While leasing revenue represents only 0.5% of total revenue, it contributes a substantial 11.5% of EBIT, showing its high profitability. With a compound annual growth rate of 13.7% in rental income and 14.7% in funds-from-operations (FFO), the leasing segment has become a powerful driver of value for Ingles. This shift to property leasing not only provides Ingles with additional revenue but has also elevated its EBITDA margin to a normalized 4.7%, creating a strong base for sustained cash flow and growth.
Despite its hidden value and strategic shift, the market continues to undervalue Ingles, primarily viewing it as a regional supermarket chain. Price-to-book (P/B) ratios that do not accurately reflect Ingles' intrinsic value, given the full scope of its real estate portfolio and the return on equity generated by its property investments. Adjusting for the market value of its properties would reduce Ingles’ P/B ratio from 0.87x to 0.61x, emphasizing the significant mispricing. A sum-of-the-parts valuation suggests that Ingles’ real estate holdings, grocery operations, and Milkco segment collectively justify a market cap closer to $2.6 billion, almost double its current valuation.
Additionally, Ingles’ debt management and capital discipline have strengthened its appeal as a long-term investment. With a debt-to-equity ratio reduced from over 200% to 67% in the past decade and over $403 million in debt repayments, Ingles has built a solid financial foundation. Share buybacks have enhanced shareholder value, as seen in the 2021 buyback that reduced shares by 6.3%, driving the stock price from $37 to $100. With cash reserves at an all-time high, the potential for further buybacks or dividend adjustments to reward shareholders remains strong.
Ingles’ management remains focused on long-term growth and is notably unresponsive to Wall Street pressures, having ceased earnings calls in 2018. This low profile has contributed to the company’s undervaluation, as it remains underfollowed and misunderstood by the broader investment community. However, as investors gain a better understanding of Ingles' strategic real estate investments and disciplined capital allocation, the stock’s true value could become more apparent. Ingles Markets, with its undervalued grocery business, hidden real estate assets, and disciplined management, represents a compelling opportunity with substantial upside potential, making it an attractive choice for investors seeking both growth and stability in the grocery and real estate sectors.
Ingles Markets, Incorporated (IMKTA) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 17 hedge fund portfolios held IMKTA at the end of the second quarter which was 17 in the previous quarter. While we acknowledge the risk and potential of IMKTA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than IMKTA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.