Should I Buy Whole Foods Stock? 3 Pros, 3 Cons

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Whole Foods Markets (WFM) reports quarterly earnings on Wednesday and the market will be keen to hear if the upscale grocer has arrested its sales decline and can get Whole Foods stock out of the deep, deep red.

whole foods stock earnings wfm stockIndeed, once high-flying Whole Foods stock is down a remarkable 30% for the year-to-date and has been trading sideways since May.

Part of the problem has to do with macroeconomics as cash-strapped customers remain tight with their discretionary dollars. As a premium alternative, Whole Foods needs people willing to spend more — not less — on groceries.

The other headwind comes from competition, as the big supermarket chains now offer the organic and natural products that are Whole Foods’ bread-and-butter offerings, but at lower prices. Indeed, Kroger (KR), the nation’s largest supermarket operator, has turned the tables on WFM as it steals market share and drives earnings with natural and organic foods.

In another headache for WFM management, TR Capital — a private equity shop known for such moves — launched a mini-tender offer for WFM stock. The idea is to buy below market value, so that’s another weight on the price of Whole Foods stock.

However, for all its troubles, Whole Foods remains a top brand in the industry and trades at once-unthinkable discounts. Perhaps — perhaps — its problems have conspired to offer a good entry point in Whole Foods stock.

To help decide, let’s look at some of the pros and cons:

Whole Foods Stock Pros

Whole Foods on sale: As mentioned above, WFM stock is cheaper than it has been in years. Indeed, on valuation alone, it looks like a compelling investment. The forward price-to-earnings ratio of 23 is well below its own historical average. Heck, at this time last year WFM stock sold for 40 times forward earnings.

Decent Growth Ahead: For all its problems, Wall Street sees Whole Foods putting up pretty good profit growth. Earnings per share are forecast to be flat in the current quarter but then accelerate to 45 cents from 42 cents in the next quarter. Full-year 2015 earnings should grow to $1.70 from $1.54 this year, according to a survey of analysts by Thomson Reuters.

Balance sheet strength: Whole Foods has a good amount of cash for a grocery store chain. Indeed, it holds $2.20 in cash per share. By comparison, KR has only 51 cents in cash per share. That helps support the ongoing share repurchase program and could lead to a higher dividend. The current yield sits at 1.2% but over the last five years it has averaged 1.7%

Whole Foods Stock Cons

Competition eating its lunch: Not long ago, traditional supermarket chains looked doomed as Walmart (WMT) beat them on price and WFM stole shoppers looking for quality. Those days look to be over. Kroger, with its sprawling markets around the nation has become a place for products once exclusive to Whole Foods — at lower prices.

Market sentiment: True, when enough of a stock’s float is sold short it sets shares up for a  a short squeeze, but that’s not all it says. With nearly 10% of its float sold short, the market is betting pretty heavily that there’s plenty more downside ahead for WFM stock. That weighs on shares and indicates negative sentiment on the name, but not enough to be contrarian.

Weak technicals: Finally, there is nothing in WFM technicals to suggest upside anytime soon. (See the chart.) It’s been trading around its 50-day moving average since late summer, neither finding resistance or support. At the same time, WFM remains far off its 200-day moving average. And the relative strength indicator of 63 is lot closer to overbought than oversold.

Whole Foods Stock Verdict

As compelling as the valuation may be on WFM stock, the fundamentals of sluggish sales look like they will be hard to overcome — at least in the current environment. A big knock on WFM has always been its high prices. (They don’t call it “Whole Paycheck” for nothing.) Thanks to sprawl and economies of scale, Kroger has had no trouble moving in on that turf.

Whole Foods thinks it can change its reputation for high prices with its first-ever national ad campaign, but unless it actually lowers prices, the sales are likely to stay away. That makes WFM stock a hold at best. WFM may not be a sell, but it sure isn’t a buy.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/11/whole-foods-stock-wfm/.

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