Whole Foods Markets (WFM)

[DewDiligence]

Canaccord Ups WFMI to Buy; Raises Target

http://blogs.barrons.com/stockstowatchtoday/2010/08/09/whole-foods-canaccord-ups-to-buy-from-hold-raises-target/

›By Eric Savitz
AUGUST 9, 2010, 1:08 PM ET

Whole Foods Markets (WFMI) are trading modestly higher after Canacorrd Genuity analyst Scott Van Winkle this morning raised his rating on the shares to Buy from Hold, with a new target price of $47, up from $43.

“Fundamentally, the story at Whole Foods hasn’t changed,” the analyst writes. “What has changed is the valuation and the expectations.”

He notes that the stock slumped last week after fiscal Q3 results showed an end to comp-store sales acceleration, with more modest EPS upside than in recent quarters. “We believe that the correction was the break in the share price momentum that we have been awaiting for a buying opportunity,” he writes. “While the compares are no longer accelerating, the growth outlook is as strong as ever with solid comps and a re-acceleration of unit growth likely lying ahead that will, in turn, drive even better visibility on comparable store sales growth the subsequent year.”

Van Winkle also notes that the stock is now 15% off its high, leaving the stock trading at a “very reasonable” 8.5x forward EBITDA. “We believe that investors see the 25x P/E on this year’s calendar earnings and understandably think the shares are rich,” he writes. “While we aren’t going to argue the shares are flat-out cheap, the presence of significant interest expense despite net debt of zero creates a disparity between the rich P/E and a reasonable multiple of EBITDA. As the swap on WFMI’s debt expires in October, interest expense should plummet in 2011 and we believe that WFMI will ultimately exit fiscal 2011 having?repaid the majority of its long-term debt. With that, the P/E would become more attractive?as earnings rise on the lower interest expense.”‹