Whole Foods Market, Inc. (WFM) and Vitamin Shoppe Inc. (VSI), retailers with high margins and steady growth, have been recently upgraded by analysts. Both stocks will be analyzed fundamentally and technically in this article. Investing strategies will also be presented.
Whole Foods Market, Inc.
Whole Foods Market, Inc. is the largest retailer of natural and organic foods. WFM was down 0.24% and closed at $85.79 on March 12, 2013. WFM had been trading in the range of $80.81-$101.86 in the past 52 weeks. WFM has a market cap of $15.90B with a beta of 1.01.
On March 12, 2013, Edward Jones upgraded WFM from hold to buy. Analysts currently have a mean target price of $103.15 and a median target price of $103.50 for WFM. Analysts, on average, are estimating an EPS of $0.73 with revenue of $3.03B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $2.87 with revenue of $13.06B, which is 11.60% higher than 2012.
On March 8, 2013, WFM announced, by 2018, all products in its U.S. and Canadian stores must be labeled to indicate whether they contain genetically modified organisms (GMOs). It is the first national grocery chain to set a deadline for full GMO transparency, according to the news release from PR Newswire. As said by Walter Robb, co-CEO of WFM,
We are increasing our support of organic, and we are working with our supplier partners to grow our non-GMO supply chain to ensure we can continue to provide these choices in the future. We're responding to our customers who have consistently asked us for GMO labeling and we are doing so by focusing on where we have control: in our own stores.
There are a few positive factors for WFM:
- Higher revenue growth (3 year average) of 13.4 (vs. the industry average of 3.8)
- Higher operating margin of 6.5% and net margin of 4.1% (vs. the industry averages of 2.7% and 0.9%)
- Stronger ROE of 14.7 (vs. the average of 9.0)
- WFM has a total cash of $926M and a total debt of $25M
- WFM generates an operating cash flow of $961.72M with a levered free cash flow of $375.97M
- WFM currently offers an annual dividend yield of 0.93%
Technically, the MACD (12, 26, 9) indicator is showing a bullish trend. The momentum indicator, RSI (14), is picking up but still indicating a bearish lean at 41.10. WFM is currently trading below its 50-day MA of $90.05 and 200-day MA of $91.29. The next support is $80.15, the S1 pivot point, followed by $74.68, the S2 pivot point, as seen from the chart below.
How to Invest
With a solid balance sheet, strong earnings, and steady growth, WFM remains a great long-term holding. For bullish investors, a credit put option spread of May 18, 2013, $80.5/$83 put can be reviewed to gain some upside credit premium or to acquire WFM stocks at a price below $83 upon options expiration. Investors can also review the following ETFs to gain exposure to WFM:
- Dynamic Food & Beverage (PBJ), 4.97% weighting
- Dynamic Retail (PMR), 4.96% weighting
- S&P Equal Weight Consumer Staples ETF (RHS), 2.45% weighting
Vitamin Shoppe Inc.
Vitamin Shoppe, Inc. is a specialty retailer and direct marketer of vitamins, minerals, herbs, specialty supplements and other health and wellness products. VSI was up 0.59% and closed at $50.92 on March 12, 2013. VSI had been trading in the range of $41.62-$65.93 in the past 52 weeks. VSI has a market cap of $1.54B with a low beta of 0.76.
On March 12, 2013, Goldman Sachs upgraded VSI from neutral to buy with a price target of $65 (from $60). As quoted,
The firm said recent multiple compression provides an opportunity as they still like the supplement sector's secular growth. In addition, Goldman is positive on the company's incremental pursuit of own-brand product and international expansion. This brings it closer to GNC's (GNC) more lucrative operating model.
On valuation, the analyst notes VSI's shares now trade near long-run relative P/E troughs.
Analysts currently have a mean target price of $60.00 and a median target price of $59.00 for VSI. Analysts are estimating an EPS of $0.70 with revenue of $283.30M for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $2.36 with revenue of $1.12B, which is 17.00% higher than 2012.
On February 14, 2013, VSI had closed the purchase of Super Supplements, a specialty retailer of vitamins, minerals and supplements for approximately $50M. The acquisition was funded with available cash, and the transaction was structured as a purchase of Super Supplements' assets by a wholly-owned subsidiary of the Vitamin Shoppe.
There are a few positive factors for VSI:
- Higher revenue growth (3 year average) of 12.1 (vs. the industry average of 7.5)
- Higher operating margin of 10.4% and net margin of 6.4 (vs. the industry averages of 4.4% and 4.2%)
- Lower P/E and P/B of 25.1 and 3.4 (vs. the industry averages of 54.9 and 4.9)
- VSI has a total cash of $81.17M with a total debt of 168K
- VSI generates an operating cash flow of $78.35M with a levered free cash flow of $47.53M
Technically, the MACD (12, 26, 9) indicator showing a bearish trend, but the MACD difference continues to converge. RSI (14) is showing a strong selling momentum at 31.84. VSI is currently trading below its 50-day MA of $58.23 and 200-day MA of $56.62. The next support is $46.59, the S1 pivot point, followed by $40.63, the S2 pivot point, as seen from the chart below.
How to Invest
VSI is a good buy at current valuation. VSI has a solid balance sheet (close to zero total debt), stable cash flow, and steady sales growth. However, VSI is technically bearish in the short-term. Investors might want to establish the long-term position after seeing further price stabilization, eg. MACD turns neutral or RSI (14) starts to pick up toward the neutral line.
Note: All prices are quoted from the closing of March 12, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.