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Whole Foods Market is easy to become enamored with as an investor, especially if one enjoys shopping there as much as I do. The food is very high quality and the customer service is outstanding, but investors need to be concerned about how the intrinsic value of the company compares to the market price. After all, it is very important to be sure not to pay more for a stock than it is worth.

Intelligent Investors also must consider potential investments by comparing them against companies in other industries to find the greatest opportunity for profit. By using a ModernGraham analysis, one can maintain a systematic analysis across companies and even industries to easily compare one potential investment's risk level and opportunity for value against another potential investment. What follows is a specific look at how Whole Foods Market fares in the ModernGraham valuation model.

Defensive and Enterprising Investor Tests:

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

MG Value$43.94
MG OpinionOvervalued
Value Based on 3% Growth$16.55
Value Based on 0% Growth$9.70
Market Implied Growth Rate18.10%
Net Current Asset Value (NCAV)$0.86
PEmg44.69
Current Ratio1.82
PB Ratio4.90

Balance Sheet - 9/30/2013

Current Assets$1,980,000,000
Current Liabilities$1,088,000,000
Total Debt$26,000,000
Total Assets$5,538,000,000
Intangible Assets$744,000,000
Total Liabilities$1,660,000,000
Outstanding Shares372,400,000

Earnings Per Share

2013$1.47
2012$1.26
2011$0.97
2010$0.70
2009$0.42
2008$0.41
2007$0.64
2006$0.70
2005$0.49
2004$0.51

Earnings Per Share - ModernGraham

2013$1.14
2012$0.90
2011$0.69
2010$0.56
2009$0.50
2008$0.55

Conclusion:

Whole Foods is an excellent company that must be on the watch list of all Enterprising Investors. The company may not qualify for the Defensive Investor, due to a current ratio that isn't quite high enough, a lack of a solid dividend history, and high PEmg and PB ratios, but the company passes the requirements of the Enterprising Investor with a perfect score. Enterprising Investors wishing to follow Benjamin Graham's value investing methods should pay close attention to Whole Foods while comparing it to other companies that pass the ModernGraham requirements.

From a valuation perspective, the company appears to be trading at a slight premium. Growth has taken the company's EPSmg (normalized earnings) from $0.50 in 2009 to $1.14 in 2013, a solid level of growth; however, the market is currently pricing the company at a level that surpasses the intrinsic value calculated by the ModernGraham valuation model.

What do you think? What value would you put on Whole Foods Market? Is there a company you like better?

Disclosure: The author did not hold a position in Whole Foods Market (WFM) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Quarterly Valuation Of Whole Foods Market