Description

Here’s a fun fact.  With just 551k shares outstanding, DIT has the fewest number of shares outstanding of any listed company in the US.  And with 353k of them held by the CEO, it should go without saying that this is probably a PA account only name.  But since fun facts are no reason to purchase a company, let me explain why I believe it’s worth a look.

Amcon Distributing is a name that has been written up a few times on VIC, most recently in 2013.  I think it currently presents a reasonable opportunity for generating relatively safe and above average returns over the next few years. 

DIT is a wholesale distributor to convenience stores in the Rockies, Plains, and Mid-South regions of the country and the vast majority (>80%) of their revenue and profit comes from tobacco and cigarette distribution to said stores.  Most of these stores are family owned and in rural and small cities.  As stated in the 10-Q, they are the 7^th largest convenience store distributor in the country according to Obscure Sports Quarterly Convenience Store News. 

This is a sleepy business.  I hope it stays that way.  It should be a steady grower in terms of book value like it has in the past with upside spurts of accretive acquisitions.  The goal of this one is a 10-20% IRR over your time horizon in most macro economies.  It should add some diversification away from some more speculative names in a market priced like the one we are in.

Wholesale distributing is primarily a scale, geographic, and relationship business and margins are thin as expected.  They’ve made $9mm in net income in the first 9 months of this fiscal year on either $1.21bn in topline sales or $72mm in headline wholesaler spread.  The company has averaged about $7 in EPS for the better part of the past decade and book value has increased about 10% per year over the same time frame. 

They’ve been making operational improvements for the past few years and investment in technology to improve the distribution processes.  Just given the size of the company, an investment of a few million dollars hits earnings over a couple years which has masked some of the bottom-line growth.  The results of these improvements really started to hit about 2 years ago, so some of the improvement has been hidden in the COVID noise. 

The company turns over inventory every week or so and has no long-term purchase agreements or delivery agreements, so from that perspective they are a good inflation hedge.  And the short duration of A/R gives comfort that they are not at risk from their customers.

For calendar 21, they’ll do about $21 in EPS.  The main catalyst of the past year has been the acquisition/creation of Team Sledd in early 2020, a wholesaler in West Virginia which DIT owns 49% of.  This purchase cost DIT $6.5mm in cash and $3.5mm in debt and in the first 9 months of this fiscal year, that acquisition has netted $1.5mm in net income.  The Sledd acquisition appears to be a great purchase and has added about $5 per share in EPS.  Now of course, I’m not saying this is repeatable, but the company continues to look for acquisitions though understand that CEO Chris Atayan is a savvy/shrewd purchaser. 

Speaking of Chris Atayan, he’s been investing his own money into DIT for almost 20 years and owns about 2/3 of the company.  This is both a blessing and a curse for the minority investor.  There is valid concern (as for anyone who owns and runs large stakes of public companies) about him potentially running the company as a personal piggy bank.  Given his track record though, I personally like investing alongside him. 

Given that this was written up 8 years ago, I’d like to bring up some of the old comments to demonstrate how this company has barely changed yet has grown 10% per year in the interim.

·        “Any thoughts on how a customer chooses distribution partners?  AMCON makes a big deal out of customer service as an essential element of the sales process... is that true or is this really just about price?” 

o   “A customer chooses a distribution partners based on price and timeliness.  You'll notice that most of DIT's distribution centers are in the midwest / upper midwest and thus it provides services to those states that are less dense population wise.  It is difficult for a new competitor to come in and "beat" DIT from a speed of service perspective simply due to number of miles driven.  To be effective in DIT's market, a competitor would need to steal a larger number of DIT's customers, which does not seem likely. Or that competitor could operate at a loss, I guess.”

This is still completely accurate.

·        “To me this is a pretty basic, slow growth, low volatility company where the most logical way to value this is off of price to earnings.  And 7ish times earnings with a owner operator being in charge is fairly appealing.”

We are currently at the same status today.

·        DIT probably gets the award for the most boring new company posted to VIC in the past few years.

Still most boring.  This writeup is likely already too long.

·        “At the end of the day, Atayan owns 35% of DIT and he "bought" this position (i.e, he was not given it via options).  When he bought Shanks, he was using his own money in many respects.  You have to develop some level of "trust" given aligned interests that he is making the right capital allocation decisions.  I don't expect disclosure to ever improve materially, and I do expect Atayan to sell DIT at some point, but only when it is selling for a much better P/TBV multiple.  McLane (owned by another smart investor in Omaha, NE ironically) and Core-Mark are both potential buyers of DIT longer-term.“

This is even more true now that Atayan owns 2/3 of the company.  The endgame here is a sale to a larger player whenever Atayan decides he’s done. Until that point, you’re stuck with this trading at a lower multiple due to the majority ownership.  Additionally, the company will continue to pay special dividends on what one would assume is Atayan’s personal discretion.  Last year there was a $5 dividend, could we see a $10 special this year?  Part of me believes that the div covenant continues to exist simply to give Atayan coverage for choosing when and how to pay extraordinary divs. 

Furthermore, the company is quite limited in buybacks due to the low float and turnover.  They have the authorization to do a buyback, but the liquidity limits this severely.  Really the only way the company has been able to buyback shares in the past has been individual blocks with individual shareholders.  Should you be one of the lucky few who could even accumulate a few thousand shares, there's probably a shadow bid form the company directly.  Keep in mind that round lots for this name are units of 10, not 100 – so liquidity is lower than it appears on BBG, etc.

So, what’s it worth?  Well, you get paid to watch the grass grow 10%+ per year and eventually one day you’ll wake up getting acquired by McLane for a 50% premium.  I'd put the guiderails at $100 for where you could sell directly to the company, and $250 for where they'd take a buyout.  

RISKS

CEO ownership – explained

Cigarette dependency – A shift to vaping or e-cig products may hurt, but given the recent FDA decisions this seems less likely, although a real risk long term.

·        “Now for the negatives:

• The Retail division (i.e., 14 natural foods stores that make no sense strategically) has languished and is now close to breakeven, versus decent profitbability several years ago”

This is still true.  They own these dopey natural foods stores thinking they can turn into a vertically integrated Whole Foods.  It still hasn’t been working.

Higher fuel prices given they don’t hedge.  But they have the ability to pass this cost right though given it is macro related just like employment.

Company goes dark.  They had less than 300 shareholders as of last year and could go dark if they wanted.  

Catalyst

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