Shares of Whole Foods Market, Inc. (NASDAQ:WFM) have steadily returned 48.57% over the past 12 months. At $97.70 per share, the stock is trading at very close to its 52-week high of $98.47 achieved recently. The company's fundamentals are solid and its business is riding on the tailwind of healthy foods increasingly becoming the popular choice of consumers. However, a quality company's stock does not necessarily represent a quality investment. In this article, I will illustrate the thoughts that helped in formulating my investment decision on WFM shares.
My analysis performed below is primarily based on a set of WFM's comparable peers such as The Fresh Market (NASDAQ:TFM) and The Kroger Co. (NYSE:KR). The stock value is estimated by equally weighting the valuations calculated by five different peer-average trading multiples (see comparable analysis table below).
Firstly, let's take a look at WFM's financial strengths:
1. Analysts on average predict WFM's revenue, EBITDA, and EPS to rise by 2-year CAGRs of 14.1%, 20.3%, and 22.3% over the current and next fiscal years (see table above). The rates are substantially higher than the peer averages of just 6.5%, 7.4%, and 15.9%, respectively.
2. WFM also enjoys superior profitability (see table above). WFM's various margin measures outperform the group averages by a significantly amount. Despite having a LTM ROE marginally below the average, the company's LTM ROIC of 13.4% is significantly higher than the average of 9.8%.
3. WFM carries almost no debt, which is rare in the food retailing industry as the peer average debt to capitalization ratio and debt to EBITDA multiple stand at 38.9% and 1.6x, respectively (see table above).
4. WFM also has a superior liquidity position (see table above). The firm's LTM FCF margin at 3.3% more than doubles the peer average of only 1.2%. Both the company's current and quick ratios are much better the peer averages, reflecting a healthy corporate balance sheet.
5. In addition to the firm's relative financial performance, its financial estimates including revenue, EBITDA amd EPS have been revised upward for multiple times over the past 12-18 months, indicating the market's growing confidence in the company (see table below).
Now let's focus on WFM stock's valuations:
1. Accounting for WFM's robust growth potential, the shares are trading at 1.7x PEG compared the group average of 1.3x, implying that the stock's valuation is quite expensive relative to the firm's growth prospects (see comparable analysis table above).
2. The current stock price of $97.70 implies a whopping 111% valuation premium over the five peer-average trading multiples (see table below). Even with a much stronger financial performance and attractive market position, the huge valuation gap is still somewhat difficult to be justified.
3. Moreover, by comparing WFM's current financial performance with the historical performance in exactly a year ago (see table below), the company's overall financials has improved only slightly. Nevertheless, WFM's market cap has increased by 57.9% from $11.4B to $18.0B, and the five valuation multiples have expanded by an average of 31.4%, reflecting a sign of overvaluation.
In conclusion, despite the strong and healthy fundamentals, Whole Foods Market's shares are priced for perfection and therefore offer very little margin of safety. Any corporate developments that slightly disappoint what the market currently expects would likely trigger a price correction. As such, I would not recommend buying the stock at the current lofty price.
Comparable analysis and relative valuation tables are created by author, all other tables are sourced from Capital IQ, and all financial data is sourced from Capital IQ and Morningstar.