Whole Foods Market (WFM) just came out and crushed earnings causing the stock to go up 10% today. I owned Whole Foods a few years ago but sold it for a nice profit at around $40 per share. Right now it’s at $103 per share. Ouch right? Well, yes and no. Let’s see what I think the stock is worth right now.
I am a big believer in buying companies that have strong balance sheets and Whole Foods definitely has that. They have enough current assets ($2.1Billion) on hand to pay off their ENTIRE debt with one stroke of the pen ($1.49Billion). Good start. Obviously a company that will be able to weather some downturn and pay their bills if push came to shove, or restart their business with a new strategy if they needed to.
So now let’s look at book value, which the weight of any business. Currently, their book value per share is $19 which puts their Price to Book Value over 5, which is quite the premium. Based on the Graham method of Book Value valuation, which I seem to have enjoyed, he likes a PE Ratio X Price/Book Value to be under 22.5.
Looking at their earnings, they have increased revenues and earnings steadily over the last 10 years. Revenues came in at $3.149Billion and Net Income of $98MM in 2003 and this past year, 2012, they had revenues of $11.7Billion with Net Income of $465MM. And the path to that is very steady and consistent. All around a solid company with solid financials and solid earnings.
Finally, cash flow from operations was $961MM, which is phenomenal. As a comparison, the market chain, SuperValue (SVU), has revenues of $17Billion and Free Cash Flow of $751MM, so the revenue to free cash flow ratio is much better for Whole Foods, but it is to be expected with higher margins and higher end customers.
But as we always say, great companies can sell for terrible prices and I think this is one of those situations. It is still a high end grocery chain with $11Billion in revenue so the top line revenue growth is probably not going to grow at past rates. 2003-2007 saw revenue growth of 16% per year while 2008-2012 was 8% per year. Now, in all fairness, 2008 to 2009 was one of the worst economies to hit this country and high end shoppers were probably a bit more apprehensive about spending money at these stores…
So what do I think it’s worth? Definitely NOT $103 per share. At this price, I would pass on Whole Foods and find another company to invest in. Which one? I won’t get into that now but check my posts in the future for good stocks to buy…But what do I think Whole Foods is worth?
I have taken the last 3 years of Net Income and averaged it out to get $351.34MM and then multiplied it by a factor of 20. The reason for the higher multiple than is typical in the market is that this is an average of 3 years so the number is supposed to be lower than current. If we do this, this takes our market cap to $7Billion and compared to the current market cap of $18Billion, I would need to buy this for around $38 per share. Yes, quite the discount to today’s price, but remember, right now, they are selling for 38 times earnings which is WAY too much for a company like this. Also, at $38 per share, it would take the PE to 15.5 and the Price to Book Value to 2. Now based on the Price X Book Value per share of 31 being a little rich, I am actually not as concerned about it due to the brand that is here and the strength of that brand. With nice margins, as compared to other grocers, and the steady growth in revenue and earnings, I am willing to look past the value of 31 there.
This would also take the dividend yield from 0.9% to 2.4%, which is nice and healthy. And speaking of dividend, their dividend payout ratio has been inconsistent which is one of the only bad things I can say about the company.
All in all, great company. Great financials. Bad value. That is pretty typical these days, but I would love to buy this stock sub $40 per share, which is where I had sold out at…years ago.