As much as shares in Whole Foods Market, Inc. (NASDAQ:WFM) have underperformed this year, WFM stock is still too pricey.
Three years ago, Whole Foods was a Wall Street darling. WFM stock had an accelerating growth rate and a dominant position in the natural and organic foods retail sector. Naturally, every competitor in the supermarket business took notice and came gunning for Whole Foods’ market share.
Wal-Mart Stores, Inc. (NYSE:WMT), Kroger Co (NYSE:KR) and Costco Wholesale Corporation (NASDAQ:COST) beat the company at its own game. It wasn’t even all that hard. The key was to make prices lower than notoriously expensive “Whole Paycheck.”
And the worst is not over. WFM’s revenue growth rate is now rising much more slowly than that of the grocery store sector. Even worse is that the paltry sales gains are being driven by new store openings. Same-store sales — a critical industry metric — have declined in four consecutive quarters. Predictably, operating margins have taken a hit as well.
WFM Stock Is Ugly
Whole Foods stock has lost 15% so far this year. It got a bit frisky the first week of October on rumors of a merger with Kroger, but talk is cheap. Whole Foods stock needs some sort of fundamental turnaround or perhaps an activist investor to shake things up. There sure doesn’t appear to be any catalysts for WFM when it reports quarterly earnings in early November.
Whole Foods stock has lost 30% in three years and the trend remains to the downside. Sentiment on the name has fallen to the point that investors now pay 20 times trailing earnings. At its peak, WFM commanded a premium of 45 times earnings.
And even after that, it’s still not a bargain. Whole Foods stock remains significantly more expensive than the broader market despite having a much lower growth rate. Indeed, analysts think WFM stock can deliver a compound annual growth rate of just 4.2% over the next five years. Investors are paying 19 times forward earnings for this poky growth rate. You can find utilities with hotter growth rates. Go figure.
The valuation also flies in the face of the company’s consistently downbeat outlook. If anything, stocks usually overcompensate to the downside when faced with guidance cuts.
Bottom Line on Whole Foods Stock
Outside of a merger, which appears unlikely, or an activist investor, WFM stock looks terrible. The profits picture is one of declining earnings per share. The only thing propping up Whole Foods stock at such levels is the multiple. At some point, something has to give.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
