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.”‹
[Identical-store comps of 8.1% are damn good in this economy and are even better than the company’s historical average. On reason for this is that the average age of WFM’s stores is increasing, and older stores are more profitable, on average, than newer ones. (This point is often overlooked and was the subject of a post on this board 1.5 years ago: #msg-46389807.)
Based on the company’s FY2012 EPS guidance of $2.21-2.26, the stock is trading at a FY2012 P/E of about 30x.]
LOS ANGELES, July 27 (Reuters) - Upscale grocer Whole Foods Market Inc's (WFM) quarterly profit rose a larger-than-expected 35 percent and it raised its full-year profit forecast, fueled by robust sales and snatching market share from other supermarkets.
Shares of the biggest U.S. seller of organic and natural food products rose 4.4 percent in after-hours trade.
Whole Foods' report, issued on Wednesday, eased worries that the sales growth that has driven a healthy 60 percent gain in the stock over the past year could slow.
Net income for the fiscal third quarter ended July 3 rose to $88.5 million, or 50 cents per share, from with $65.7 million, or 38 per share, in the year-earlier period.
Sales rose 11 percent to $2.4 billion. Closely watched identical-store sales, which exclude relocations and expansions, jumped 8.1 percent.
"Sales momentum has been maintained, no doubt about it," said BB&T Capital Markets analyst Andy Wolf, who noted that quarter-to-date identical-store sales at Whole Foods are up 9.3 percent.
Wolf said Whole Foods' upper-end consumers appear to be maintaining their shopping habits despite higher prices for food and fuel.
"We are continuing to gain market share at a faster rate than most public food retailers," Walter Robb, Whole Foods' co-chief executive, said in a statement.
Whole Foods was harder hit than rivals such as Kroger Co, Safeway Inc and Supervalu Inc when the U.S. economy slid into recession.
The downturn and resulting contraction in consumer spending prompted Whole Foods to revamp its pricing to focus on value. The company, known by some as "Whole Paycheck," has since emphasized lower-priced store brands and recently rolled out "extreme value" items like wines that sell for around $3.
Those steps were behind a turnaround at Whole Foods, helping it to keep pace with other large supermarket chains.
Kroger in its latest quarter had a 4.6 percent gain in identical-supermarket sales, while Safeway posted a 0.5 percent rise. Supervalu saw its identical-supermarket sales drop 3.9 percent.
Based on its strong results, Whole Foods raised its full-year earnings forecast to $1.91 to $1.92 per share from $1.87 to $1.90 per share previously. It also forecast fiscal 2012 earnings of $2.21 to $2.26 per share.‹
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