Whole Foods Market's (NASDAQ:WFM) stock price declined since the company announced its quarterly results on February 12th, 2014. The stock price declined because the company missed analysts' estimates. The company missed analysts' estimates concerning earnings per share by 2 cents during the most recently ended quarter. As a result of low growth the company revised its 2014 outlook. The company reduced its diluted earnings per share estimate from $1.65-$1.69 to $1.58-$1.65. Let's have a look at the company's future prospects and its ability to grow in the market in order to determine whether or not it is a profitable investment opportunity.
Customers are becoming more health conscious in the United States. Health problems like obesity are compelling customers to question their purchasing trend of unhealthy and less nutritious food items. Now, customers are looking for food that is flavorful as well as healthy. Therefore, I believe that Whole Foods Market, America's first national "certified organic" grocer, will experience strong growth in its top and bottom lines in the future.
According to a report, organic food industry sales grew steadily from a mere $3.5 billion in 1996 to $31.5 billion in 2011 which shows a 15.78 percent CAGR during the period. Therefore, I can conclude that the demand for organic food increased significantly and owing to health concerns I believe it will continue to improve in the future as well.
With regards to the future of the global organic food and drink market, TechNavio's analysts forecast it to grow at a CAGR of 14.3 percent from 2012 to 2016. Such a huge increase in the demand for organic food will drive the growth in the top line of companies like Whole Foods Market in the future.
The following chart explains organic food product types and their growth. Organic food products with 100 percent certified organic ingredients lead the market. They have a market share of 46 percent and experienced a growth of 18 percent. The products with 95 to 99 percent organic content captured a growth of 18 percent while products with between 70 and 94 percent organic content experienced a growth of 17 percent and have a market share of only 14 percent.
According to a report from SPINS, organic products continued to grab market share from conventional processed products as a result of new trends in consumer spending. Therefore, in such an optimistic scenario of organic food demand, I believe that the other players in the industry will also try to take advantage of this trend and this will eventually intensify the competition in the future.
I see Whole Foods Market as a good investment opportunity. Though the company is not used to new competition I believe that the competition is good and will compel the company to stay on track. Although customers are becoming more health conscious if the competition increases then they will begin to look for value too. That is why Sprouts Farmers Market (NASDAQ:SFM), in my opinion, is the biggest threat to Whole Foods Market because of their lower prices. However, Whole Foods Market is also trying to change its impression as an overpriced grocery chain and is trying to attract customers from low-income brackets.
The company currently has a total store count of 373 totaling approximately 14.2 million square feet. The company has a long-term plan to open 1,200 stores in the United States. In order to capture the growth in the organic food market the company expects to cross the 500-store mark in 2017. Therefore, I believe that the company will be in a better position than its closest competitor because of its wider network in the future.
The company's PEG ratio is lower than its closest competitor. The company has a PEG ratio of 1.88 times while Sprout has a PEG ratio of 2.93 times. Moreover, the company's PEG ratio is also lower than the industry. The industry's average PEG ratio is 2.05 times so on a PEG basis, the company seems quite undervalued relative to its competitor as well as the industry.
The company recently missed the earnings estimate and this caused a plunge in the stock price. I see this plunge as a good opportunity to invest since the company has a strong future outlook. The increasing demand and growth plan will help the company to bolster its earnings in the future.
Although the stock has a higher price-to-earnings multiple than the industry its growth and 5-year expected PEG is lower than the industry and its competitor. Additionally, Whole Foods Market has a wider network compared to its direct competitors. Moreover, due to the increasing number of customers switching towards organic food I believe Whole Foods will continue to outperform the market. Owing to the larger market share and better future outlook I do not believe investors should be worried about the stock and I would recommend investing in the stock.