Core-Mark Holding Company, Inc. (CORE): Will You Be On The Mark With This Core Stock Pick?

Peter Lynch loved to visit malls to seek out investment ideas. When you see convenience stores popping up in your neighborhood, Core-Mark Holding Company, Inc. (NASDAQ:CORE), one of the largest distributors of fresh products to convenience stores in the U.S., might come up as an interesting investment candidate. Core-Mark Holding Company, Inc. (NASDAQ:CORE) is benefiting from the growth in single convenience stores and the increased focus on fresh food. Furthermore, it is undervalued relative to its peers with a forward P/E of 13.

Growth in single stores positive for Core-Mark

An owner of a single convenience store is more likely to do business with wholesale distributors like Core-Mark Holding Company, Inc. (NASDAQ:CORE), compared with large convenience store retail chains. Larger convenience store retail chains might handle their own distribution to achieve cost savings resulting from economies of scale. According to a presentation by The National Association of Convenience Stores (NACS), the number of single convenience stores grew twice as fast as the entire convenience retail industry. The total number of convenience stores in the U.S. grew by a 12 year CAGR of 1.9%, from 119,751 stores in 2000 to 149,220 stores in 2012, compared with a CAGR of 3.8% for single convenience stores. Single convenience stores also now make up 62% of all U.S. convenience stores, compared with 50% in 2010.

The owner and operator of a single convenience store will not have advanced inventory management systems, big advertising budgets, or sufficient working capital. This is where a wholesale distributor like Core-Mark Holding Company, Inc. (NASDAQ:CORE) leverages its scale to provide support to small convenience store operators with such services. Moreover, direct sourcing is not an option, given that most suppliers will not want to deal with such small orders.

Gaining market share from direct-store-delivery (DSD)

Convenience stores typically source their products from wholesale distributors like Core-Mark Holding Company, Inc. (NASDAQ:CORE), beverage companies like Miller-Coors and The Coca-Cola Company (NYSE:KO), and DSD vendors. The beverage companies are out of bounds for Core-Mark, but grabbing a bigger slice of the pie from DSD vendors is a real possibility. Core-Mark mentioned that it has taken close to one-fifth of the market share of DSD vendors from 2008 to 2012, according to management comments at the 4Q12 earnings conference call.

If you’ve ever witnessed convenience store staff excusing themselves halfway through an inquiry or purchase to sign for the receipt of goods, you will appreciate the issue with multiple DSD vendors serving smaller convenience store operators. Smaller convenience store operators have to assign more staff to handle multiple deliverymen and check for stock, if they chose not to consolidate purchases with a fewer number of wholesale distributors.

Fresh (food) opportunities

At a meeting a few weeks ago, a manager of an Asian supermarket chain shared with me that margins for fresh food are much higher than both national brands and private labels. He explained that the fragmented nature of fresh food suppliers and consumers’ emphasis on the quality of fresh food account for that. Core-Mark shared similar views of the U.S. market in its most recent 10-K, adding that it has invested in its refrigerated infrastructure in recent years to increased refrigerated capacity.

Peer comparison

Core-Mark ‘s peers include SYSCO Corporation (NYSE:SYY) and United Natural Foods, Inc. (NASDAQ:UNFI).

Unlike Core-Mark, which mainly supplies to convenience stores, SYSCO Corporation (NYSE:SYY) distributes over half of its food products to restaurants, with hospitals, schools, and hotels making up the rest of its customer base. Not content with having one-fifth of the market share of the fragmented food service industry, Sysco recently rolled out its new Solutions and Services business last week, which provides services such as cost management and customer relationship management to restaurant operators. This is a step in the right direction, as value-added services will position Sysco as a trusted advisor in the mind of restaurateurs, as opposed to just being a supplier.