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The share price of Whole Foods Market (NASDAQ:WFM) has dropped by 15.5% from its 52-week high of $101.86 achieved in October 2012. At $86.05, the stock is currently trading near the 52-week low of $80.80 and offers a small 0.9% dividend yield. WFM's lofty trading multiple appears to be the primary concern that prevents many investors from buying the shares. However, I believe the recent pullback presents a great entry opportunity based on the following 4 reasons:

1. From a relative valuation perspective, WFM appears to be priced reasonably based on the company's strong financials relative to its peers' (see chart below). Consensus estimates on average predict WFM's revenue, EBITDA, and EPS to grow at 2-year CAGRs of 14.0%, 16.4%, and 17.9%, respectively. Those estimations are considerably above the averages of 6.2%, 5.7%, and 13.0%, respectively, for a group consisting of WFM's primary industry peers. Similarly, WFM's long-term earnings growth rate is forecasted to be 17.8%, markedly above the average estimate of only 12.1% for the comparables. On the profit side, WFM again demonstrates a superior performance as the company's various profitability margins and capital return measures significantly outperform the peer averages. WFM carries almost no debt as opposed to the group's average debt to capitalization and debt to EBITDA ratios at 55.1% and 2.0x, respectively. In terms of liquidity, WFM's trailing free cash flow margin is largely above par. Both the firm's current and quick ratios are above the peer averages, reflecting a healthy balance sheet condition.

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The stock's current valuation at 28.5x forward EPS (next 12 months) is 77.6% above the peer average P/E multiple at 16.1x. Nevertheless, after accounting for WFM's superior long-term earnings growth potential, the stock's PEG ratio of 1.6x is only at a 7.1% premium over the peer-average 1.5x PEG. Given WFM's robust profitability, healthy free cash flow and liquidity performance, as well as its solid market position in the natural & organic food retail sector, I believe WFM's PEG premium can be completely justified (see chart above).

2. From a historical standpoint, WFM's trailing P/E multiple is trading at a 10.5% discount to its 3-year average and the below-average valuation appears to be driven by the company's EPS growth downtrend (see charts below). However, given the following positive fundamental developments over the period, I believe even a higher valuation level should be warranted:

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1) Despite the EPS slowdown, WFM's revenue and EBITDA growth rates have been trending steadily over the past 3 years (see chart above);

2) The company has been able to drive up the capital returns as reflecting by the rising ROE, ROA, and ROIC measures in the past 3 years (see chart below);

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3) WFM has also been able to sustain stable profitability margins over the same period (see chart below); and

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4) The company has successfully deleveraged and currently carries almost no debt load (see chart below).

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3. In the past 12 months, WFM's forward P/E multiple decreased by 16.8% from 34.3x to 28.5x (see chart below). The decrease suggests a cheaper valuation relative to the growth potential provided that 1) although the company's consensus revenue, EBITDA, and EPS estimates for 2013 and 2014 experienced some declines in the last few months, their current levels are notably above the historical figures in 12 months ago (see charts below); and 2) over the same period, sell-side analysts' average estimate for WFM's long-term EPS growth has remained almost unchanged and the average target price has been raised substantially from $84.88 to $102.88 (see chart below).

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4. According to Thomson One, analysts remain very bullish on the stock. Of the total 26 ratings, there are 6 strong buys and 11 buys. In a research note dated February 15, 2013, Shane Higgins at Deutsche Bank reiterated his bullish view after the company downbeat earnings release (sourced from Thomson One, Equity Research):

"While EPS came in above the Street, investors were disappointed that ID's came in light and moderated 2Q-to-date and FY13 EPS guidance was only maintained. Taking a step back from the weather-related noise, we continue to view WFM's fundamentals favorably as the company remains well positioned to capitalize on growing demand for natural & organic groceries. WFM continues to improve its relative value position, which should keep traffic robust and op. margin expansion ongoing. Store growth plans remain on track, with new stores generating solid ROIC, giving us confidence that sq. ft growth will accelerate, driving years of DD EPS growth."

Bottom line, given the industry tailwind and the healthy financials, WFM is well-positioned for a robust long-term growth. Investors thus should consider buying the shares now on the price weakness.

All charts are created by the author except for the consensus estimate tables, which are sourced from Capital IQ, and all financial data is used in the article and the charts is sourced from Capital IQ unless otherwise specified.

Source: Recent Dip Makes Whole Foods A Buy