Whole Foods Market, Inc. (Nasdaq: WFM) is the world’s leading natural and organic foods supermarket and America’s first national “Certified Organic” grocer whose core mission is devoted to the promotion of organically grown foods, food safety concerns, and the sustainability of the world’s entire ecosystem.
The company has one operating segment, natural and organic foods supermarkets, currently operating 299 stores in the United States, Canada, and the United Kingdom. The company is based in Austin, Texas.
Basis
Financial information presented herein, is based on the company’s most recent SEC Form 10-K filing for year ending September 26, 2010, as filed with the Securities and Exchange Commission on November 24, 2010.
Short-Term Investment Valuation
The stock closed recently at $61.17, with Resistance at $66.87, a 9% increase from the recent close.
The stock price should find First Support at $60.47, a 1% decline from the recent close, and Second Support at $52.29, a 15% decline from the recent close. Should the stock price break through Second Support, the next level of support is $33.96, a 44% decline from the recent close.
Daily Relative Strength is currently 61, with the stock price nearing an oversold condition.
Earnings Growth Valuation
Earnings growth valuations are based on the spread between year over year earnings growth and the current PE.
In the case of Whole Foods Market, Inc., the company had a year over year earnings growth of 40%, ending FY10 with earnings of $2.99 per share.
With a trailing twelve month PE currently at 20, the spread between earnings growth and the PE is about 2, meaning that for an investor focusing on earnings growth, the stock should be trading near $67.01, a $5.84 increase from a recent close.
Fundamental Investment Valuation
Liquidity: The company ended FY10 with a Current Ratio of 1.55, a Quick Ratio of 0.80, a Cash Ratio of 0.62, and a Cash Conversion Cycle of 0.62 days. In addition, Goodwill and Intangibles comprised 18.4% of Total Assets, and the company ended the year with a Book Value of $13.80 and a Tangible Book Value of $9.53.
Profitability: FY10 found the company with a Gross Margin of 38%, an Operating Margin of 7.5%, a Net Operation Margin After Taxes (NOPAT) of 5.7%, a Return On Invested Capital (ROIC) of 19%, and an Effective Tax rate of 40%.
Debt: The company ended FY10 with Total Debt of $508.7 million, a year over year decrease of 44%. Additionally, the company paid an average annual Interest Rate 6.49%, a year over year increase of 1.5%, and had a Debt to Cash Ratio of 1.1, and a Debt to Equity Ratio of 0.21.
Cash Flow: The company’s FY10 Operating Cash Flow was $4.79 per share, a year over year decrease of 6%. The company also ended FY10 with Free Cash Flow of $1.12 per share, a year over year increase of 21%.
Dividends: During FY10 the company paid a $0.05 per share dividend, a 65% year over year decline.
Fundamental Valuation: Based on our review of the company’s latest annual financial information we think a Reasonable Value Estimate for the company is in the $40-$44 range.
Value Thoughts
In May of this year the company announced its trading symbol had changed from WFMI to WFM, an event the markets seemed to appreciate. A few weeks later, the company announced it had retired all of its long-term debt, an event we thought was a very big deal. Apparently nobody else did. Sorta boring, huh?
Considering a Recent Close of $61.16, an estimated Merger and Acquisition payback of 15 years (assuming EBITDA remains the same), year over year earnings growth of 40%, as well as year over year free cash flow growth of 21%, we think, on a fundamental investment basis, the stock is currently OVER PRICED, and not a candidate for additional research for the Wax Ink Portfolio..
Wax
Disclaimer
We have no position in Whole Foods Market, Inc., and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.
