Does Whole Foods Have More Upside Potential?

With shares of Whole Foods Market (NASDAQ:WFM) trading at around $51.41, is WFM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Whole Foods has now delivered 14 consecutive quarters of same-store sales growth. It also beat estimates last quarter and upped its full-year EPS guidance to $2.86-$2.89 from $2.83-$2.87. Comparable store sales growth has increased 6.7 to 7.5 percent, and identical store sales growth has increased 6.5 to 7.2 percent. Additionally, Whole Foods has focused heavily on cutting expenses, which has been highly effective.

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Whole Foods has an established presence in many affluent neighborhoods. In the past, it seemed as though growth potential would be limited since the store didn’t cater to a mass audience. However, younger generations are more focused on a healthy diet than past generations. If this trend continues, which is likely, then the growth potential for Whole Foods could be enormous. Keep in mind that it’s not just about those who are young now, but keeping those consumers loyal to the brand as they age. Whole Foods is already performing well in areas located near college campuses. But the store opening in Brooklyn (25,000-square-foot greenhouse included) will be a bigger test. If successful, then there is no telling how far Whole Foods can go. However, it’s not all peaches and strawberries for Whole Foods at the moment. There are threats and negatives.

One such threat is none other than Amazon.com Inc. (NASDAQ:AMZN). It seems as though Amazon likes to stick its nose in as many industries as possible, and it usually does so with success. Amazon has been testing out its Amazon Fresh service in and around Seattle for six years. This was a wise move. It allowed Amazon to figure out what does and doesn’t work on a small scale before going bigger and running into major problems. The key for Amazon will be consistently delivering quality product. If a reputation for quality spreads, then Amazon Fresh will be a threat to Whole Foods down the road. The most likely scenario is that both companies are successful.

A negative for Whole Foods is that several insiders have sold off the majority of their positions over the past six months. While this doesn’t indicate bad news is around the corner and could simply be a matter of profit-taking, it’s still not comforting. Perhaps it relates to the price for Whole Foods, which is currently trading at 37 times earnings – considerably higher than industry peers. On the other hand, Whole Foods has a profit margin of 4.13 percent, whereas The Kroger Co. (NYSE:KR) has a profit margin of 1.55 percent, and Safeway Inc. (NYSE:SWY) has a profit margin of 1.45 percent.

As far as yield goes, Safeway is the most impressive of the three at 3.50 percent. Kroger currently yields 1.80 percent, and Whole Foods yields just 0.80 percent. To this point, it might seem difficult to determine which company of the three would present the best investment opportunity for the future, but there is one area where Whole Foods is much stronger than its peers, and it’s a strength that will help investors sleep better at night. This strength will be visited on the next page.

The chart below takes a look at some basic fundamentals for Whole Foods, The Kroger Co., and Safeway.

WFM KR SWY
Trailing P/E 37.09 12.40 8.47
Forward P/E 29.88 11.23 9.38
Profit Margin 4.13% 1.55% 1.45%
ROE 14.61% 36.87% 20.96%
Operating Cash Flow 992.72M 2.83B 1.56B
Dividend Yield 0.80% 1.80% 3.50%
Short Position 2.60% 2.10% 23.00%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Strong

Whole Foods has outperformed its peers over a three-year time frame.

1 Month Year-To-Date 1 Year 3 Year
WFM 11.96% 13.27% 16.52% 177.0%
KR 0.00% 33.29% 59.78% 88.50%
SWY -4.97% 25.58% 23.32% 15.74%

At $51.50, Whole Foods is trading above its averages.

50-Day SMA 48.78
200-Day SMA 45.77

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Whole Foods is stronger than the industry average of 1.00. This is the area that was referred to on the previous page. There is a tremendous difference between Whole Foods and its peers when it comes to debt management.

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Debt-To-Equity Cash Long-Term Debt
WFM 0.01 1.08B 27.00M
KR 2.11 238.00M 8.88B
SWY 2.06 357.30M 6.17B

E = Earnings Have Been Strong

Earnings have consistently improved on an annual basis, and this trend is likely to continue. Revenue growth has also been consistent through the years.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 7,954 8,032 9,006 10,108 11,699
Diluted EPS ($) 0.41 0.43 0.71 0.96 1.26

Looking at the last quarter on a year-over-year basis, revenue and earnings both improved. However, both revenue and earnings declined on a sequential basis.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 2,670.28 2,727.28 2,910.33 3,856 3,027
Diluted EPS ($) 0.32 0.31 0.30 0.39 0.38

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

Whole Foods has consistently improved revenue and earnings on an annual basis, it has established its own niche where it rules the organic and natural food industry, debt management is good, margins are strong for the industry, leadership is solid, and analysts love the stock: 13 Buy, 11 Hold, 0 Sell.

On the other hand, the stock lacks resiliency – it dropped over 50 percent during the financial crisis. If the market suffers a steep correction in the future, investors won’t be running to Whole Foods for safety, especially if it’s trading at 30 times forward earnings as it is now.

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Whole Foods is the type of stock that will exceed expectations in a bull market and crush dreams in a bear market. That trend is expected to continue. Therefore, a lot depends on the reader’s opinion on the direction of the overall market. Since nobody knows how the market will perform once the Federal Reserve begins tapering, Whole Foods is a WAIT AND SEE.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.