Weis Markets: Still Chugging Along

There is a lot of worries about the current market. Oftentimes, the safest stock is one where management goes about its business without the "road shows" that attract institutions. Those institutions will result in a better stock price appreciation. But those same institutions often "head out the door" together causing uncomfortable volatility for individual investors. So, a stock like Weis Markets, Inc. (NYSE:WMK) may prove to be a less threatening investment due to the lack of institutional investors. This is especially true when a market decline appears to be threatening, as a lack of that volatile institutional backing may make for an excellent defensive pick.

Weis Markets has long been regarded as one of the safest investments in the business. The latest quarterly report shows the usual debt free balance sheet. Management also keeps enough cash and marketable securities to handle the current liabilities. This unusual financial strength approaches the classic Benjamin Graham considerations that many believe have disappeared from today's markets except for small and relatively illiquid companies.

Grocery Industry

The grocery industry has long been regarded as an excellent defensive stock because people need to eat in good times and bad. Therefore, there is no cyclical nature in the obvious sense of a lot of industries that I cover. Margins are generally the same for a grocery.

As someone who spent time working in the poultry industry, we regularly saw reports that the average profit per sales dollar throughout the grocery industry was around one-half cent per sales dollar. That slim margin required some top-notch management in an industry that sold a lot of things where prices constantly varied. It was very easy to lose a lot of money quickly.

I once had a student of a family that owned a grocery store in town. That student's father explained to his son that he often had to make decisions fast or the deal was gone. Therefore, a strong math background was required along with the ability to do a fair number of calculations in your head. Comparisons needed to be intuitive and so a lot of experience was required. It was very easy to end up with expensive merchandise that would not sell.

Weis Markets

Given the above industry conditions, the grocery market part of the industry is one of the more challenging to survive long-term as an independent. Often times, the ability to negotiate price is limited and the big chains often have a huge advantage. The sheer numbers of grocery stores would indicate little to no barriers to entry.

Weis Markets generally has a pharmacy in each store to take advantage of the pharmacy margins while attracting customers who can pick up prescriptions while purchasing food. It would appear that a pharmacy part of the grocery store is becoming far more common. For a long time, this was one of those extra things management did to boost margins. The margin boosting game will vary over time because competition quickly adapts.

But still expanding from one store to a chain is very unusual. Therefore, the founding of a company like Weis Markets and its subsequent expansion has been nothing short of remarkable. Weis Markets continues to be a family-owned company with a "steady as she goes" strategy. As is typical for many family-owned companies that I follow, the business is paramount while promoting the company's strengths and accomplishments is way down the list. It is likely to remain that way for a very long time to come.

The company website now shows stores in Pennsylvania (where the company began operations) with expansion into New York, and now Maryland and Delaware.

Strategy

The company has maintained an unusually large margin for the grocery industry that exceeds 2% currently. That margin allows for unusual profitability that allows for the debt free balance sheet with a lot of cash and liquid marketable securities. Very few stores in any industry operate with no debt.

Similarly, the business strategy appears to be to open some stores while closing less stores so that the company makes steady progress over time even if that progress is unspectacular. This is one very boring company which is just the way families and individual investors like it.

The dividend history reflects this "steady as you go" strategy with a dividend that has climbed for more than two decades. This dividend is not necessarily increased every single year. But then again, it has never been decreased (to my recollection). The dependability factor is very high due to the strong balance sheet.

Regional Player

Weis markets has increasingly diversified into other local markets so that if a pricing war breaks out (as is common in the grocery industry), the results of one market become less significant to the total company results. Growth is expected to be far more even in the future due to the geographical distribution that the company is achieving.

That being stated, the company still has a primary operating area in the Mid-Atlantic region since the company began in Pennsylvania and has expanded into New York. Nonetheless, the geographic diversification is likely to slowly increase over time.

Investment Safety

Despite being one of the smaller players in the industry and despite its lack of nationwide diversification. This company has long been regarded as one of the safest grocery store investment proposals in the industry.

In addition to the strong balance sheet and the relatively significant cash and marketable securities balance is the routine progress that the company makes to grow. It is not that individual years are always larger than the year before, it is the fact that overtime, this management has shown long-term progress in an industry that has buried a lot of more substantial competitors. This is the advantage of a major shareholder, in this case a family, that is able to resist the pressures or quarterly or even annual progress in the name of a superior long-term program.

The steady dividend growth adds another attractive factor to this investment as does a lack of "road shows" to attract more institutions as common stock shareholders. The result is that this stock generally has below average volatility.

The concentration on safety means that overall growth may not be what some investors expect of a company this size. But that is the tradeoff for the safety that this issue offers.

The typical grocery stores risks are minimized through one of the best managements in the industry. There is always the risk that a key officer could pass on or retire to change this outlook. But that is probably one of the few risks that this company has.

Key Ideas

Weis Markets is a relatively small player in the large grocery store industry that has produced consistent results to the point of being boring. The company began operations in Pennsylvania and has expanded into New York and South. Likely future expansion will be in the Mid-Atlantic area.

Growth is expected to be slow and deliberate. This supports a slowly growing dividend. The result of a deliberate growth strategy is a strong balance sheet with enough cash and marketable securities to cover most, if not all of the current accounts payable. That is a very rare balance sheet for a company of this size.

Management has not attracted institutions to the company. (Note there are institutional owners, but these tend to be long-term holders as opposed to traders.) Therefore, the stock price volatility is considerably below average as a general rule.

The grocery industry is a good defensive industry to consider when the stock market is experiencing a down cycle. This stock is far safer than many competitors even considering its small size.

For, risk averse investors, Weis Markets, Inc. stock is a buy consideration because the stock price is generally within a reasonable range and the company should grow over time. The strong management and strong balance sheet, along with the above average net income per sales dollar all point to an investment with far less risk than the usual stock holding.

Long Player believes oil and gas is a boom-bust, cyclical industry. It takes patience, and it certainly helps to have experience. He has been focusing on this industry for years. He is a retired CPA, and holds an MBA and MA. He leads the investing group Oil & Gas Value Research. He looks for under-followed oil companies and out-of-favor midstream companies that offer compelling opportunities. The group includes an active chat room in which Oil & Gas investors discuss recent information and share ideas. Learn more.