Whole Foods Market: A New Year's resolution

This well-run company makes it easier to keep those vows to eat healthier, more natural foods.

By TheStreet Staff Jan 3, 2013 12:31PM

Woman carrying eco friendly shopping bag full of vegetables, low section copyright Harrison Eastwood, Digital Vision, Getty ImagesBy Marc Courtenay thestreet logo

 

You may be one of the millions of investors who experienced heartburn and digestive distress waiting for a resolution of the "fiscal cliff." Here's a possible "remedy" worth considering.

 

Why not go down to your favorite natural foods store and look carefully at the nutritious variety of delicious choices that can help your new year begin on a healthy note. You might even talk to the employees who work there and ask for a tour of all the latest, organic, gluten-free, digestively positive foods and supplements that line their shelves and produce bins.

 

If you're one of the fortunate people who has a Whole Foods Market (WFM) within driving or walking distance of your home you may want to make that one of your destinations. The stores are culinary wonderlands, and although the price-per-item is "above average," so are the profits for this visionary company.

 

As you can see on the five-year chart below, the stock's price has come a long way. You can also directly correlate it with the company's trailing 12-month price-to-cash flow.

 

wfm chart

 
























As of the quarter that ended on Sept. 30, WFM had year-over-year quarterly earnings growth of almost 50%. Its year-over-year revenue growth for the same quarter spiked 24%. That's what I'm talking about!

 

Another big positive for Whole Foods concerns its competition. In short, there is none. Yes, there are some fine locally run, privately-owned natural food stores. But none have the selection and growth model that separates Whole Foods from the herd. Plus, it is publicly traded and has plans to expand.

 

Now before you get too "hot to trot" about owning shares of WFM, I'd like to serve up a few caveats for discriminating investors to ponder. First, the stock is trading at almost 37 times trailing earnings and 27 times forward (1-year) earnings. Its price-to-earnings-to-growth ratio stands at 1.85, yet its trailing-12-month profit margin is not even 4%.

 

Analysts have a consensus one-year target price of just under $105. With the price currently above $91 there appears to be some worthwhile upside potential, but please consider using a stealth trailing-stop-loss system to protect both your gains and your downside risk.

 

The company will report its earnings from the final quarter of 2012 on Feb. 4. Traders may want to buy some shares now and watch WFM up to Feb. 4. If we have some days where the market sells off and the shares trade down to $90 or below you might consider accumulating then.

 

WFM is a growth story. Its dividend yield is currently below 1% representing a payout ratio of only 22%. With nearly $920 million in operating cash flow and levered free cash flow (TTM) of around $393 million, it wouldn't be a stretch for the company to double its dividend and still be cash-strong.

 

In 2013, many of us resolve to own best-in-class, fiscally sound standout companies like Whole Foods Market. We want companies with proactive yet careful management, little if any debt, with an eye for new frontiers and accretive opportunities. Again, WFM fits that description.

 

Often controversial co-founder and co-CEO John Mackey believes in the future of the company so much that he owns almost 817,000 shares representing a current valuation of nearly $75 million! Yet he and the other officers aren't buying at these share price levels, although no big selling is going on either.

 

Keep a hopeful eye on WFM and its stock. Be patient, waiting for a price that represents both a P/E and a PEG ratio that helps you feel you're getting in at a reasonable cost. In the meantime, get to know how they make money and how they'll continue to sustain and grow the company's cash flow and bottom-line earnings.

 

What a healthy way to anticipate both a prosperous and nutritious year ahead.

 

At the time of publication the author held no positions in any of the stocks mentioned in this article.

 

 

 

More from TheStreet.com

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
284
284 rated 2
461
461 rated 3
671
671 rated 4
628
628 rated 5
618
618 rated 6
615
615 rated 7
495
495 rated 8
347
347 rated 9
115
115 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
DYNDYNEGY Inc10
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.