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In last Friday's edition of Lighting Round on his Mad Money program, Jim Cramer was bullish on Whole Foods (NASDAQ:WFM), Holly Frontier (NYSE:HFC), Altria (NYSE:MO), Philip Morris (NYSE:PM), Edward Life Sciences (NYSE:EW), and Salesforce.com (NYSE:CRM), while he was bearish on Manhattan Associates (NASDAQ:MANH) and SuperValu (NYSE:SVU). For this article, I have selected WFM, HFC and EW for detailed fundamental and valuation analysis.

Holly Frontier and Edward Life Sciences are mid-cap stocks and have a very similar market capitalization (approximately $8 billion). Whole Foods is slightly larger with a market capitalization of the $15.54 billion. All three companies were strong performers during the last 5 years with the stocks up from a low of 72% for HFC to a high of 189% for EW. However, EW declined in price last year with the stock losing 18%. WFM shares gained 41% during this time period. None of the three companies are attractive from a dividend standpoint. In fact, EW does not even pay a dividend. HFC has the highest dividend of the three companies yielding 1.1%.

Next, I evaluated the historical growth rates of revenue, income, and the projected growth rates. These are summarized in the table shown below:

Growth Rates

WFM

HFC

EW

Revenue

3 Year

8%

38%

11%

1 Year

12%

86%

16%

QOQ

13%

125%

10%

Total Income

3 Year

44%

103%

22%

1 Year

39%

884%

9%

QOQ

33%

1420%

-3%

Growth Projections

Next Year

15%

-23%

27%

Next 5 Year

18%

31%

27%

HFC and WFM have reported strong growth rates in revenue and income over the last 3 years. EW's net income growth rate has decelerated and has in fact declined in the most recent quarter compared to the same quarter of the previous year. Going forward, although analysts expect HFC's earnings to decline next year, over the long term, a 31% growth rate is projected. WFM and EW are also expected to increase their earnings at a rapid pace.

Having analyzed the historic and projected growth rates, I looked at the operational metrics such as margins and returns on equity and assets. These are shown below.

Margins

WFM

HFC

EW

Gross Margins

3 Year

38%

10%

75%

Last Year

38%

13%

74%

TTM

38%

13%

74%

Operating Margins

3 Year

5%

7%

19%

Last Year

5%

11%

17%

TTM

6%

11%

17%

Operations

WFM

HFC

EW

ROE

3 Year

10%

16%

18%

1 Year

12%

20%

18%

ROA

3 Year

6%

5%

13%

1 Year

8%

10%

12%

HFC has improved its margins over the last 3 years while WFM has done a good job in maintaining its margins. EW's operating margins are down from 19% to 17%. However, the return on equity was consistent over the last 3 years. WFM's ROE of 12% is a low in my opinion.

Having developed a good idea about the fundamentals of the 3 companies, the next step was to perform relative valuation. The multiples used in the analysis were based on historical analysis of individual company and industry multiples. The table below presents the valuation analysis results.

Valuation

WFM

HFC

EW

Next Yr Proj EPS

$2.68

$3.84

$3.46

EPS Growth Rate

18%

31%

27%

Future EPS (5 Yr)

$4.06

$8.60

$7.13

Expected P/E

27

7.5

22

Price 5 Yrs Out

$109.66

$64.51

$178.19

Unlevered Beta

0.78

0.97

1.13

Debt to Equity

1%

23%

11%

Current Tax Rate

35%

35%

35%

Levered Beta

0.79

1.12

1.21

Risk Free Rate

2%

2%

2%

Risk Premium

6.00%

6.00%

9.00%

Size Premium

-0.36%

0.62%

0.62%

Cost of Equity

6.4%

9.3%

13.5%

Fair Value

$80.60

$41.33

$83.19

Current Price

$84.29

$35.63

$71.15

% Overvalued

4%

-16%

-17%

As shown in the table above, HFC and EW are significantly undervalued at current levels. However, I would avoid buying EW at current levels owing to the declining fundamentals. I would wait for a further decline in stock price to the $63 levels before opening a position. WFM is fairly valued in my opinion. Of the three companies analyzed, HFC is my preferred investment choice.

Disclaimer: Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision.

Source: My Take On Cramer's Picks: 1 To Buy, 1 To Hold, 1 To Avoid