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Whole Foods Market Is Popular but Richly Valued

In fiscal year 2013, the company had sales of approximately $13 billion and currently has 374 stores in the United States, Canada and the United Kingdom. In December co-CEO and company co-founder John Mackey increased his long-term U.S. store count goal to an optimistic 1,200 from an earlier plan to reach 1,000.

Mackey and his colleagues know the healthy, organic and natural products industry is growing by leaps and bounds. According to industry trackers, this rapidly expanding segment comprises a market of about $150 billion that is expected to grow by almost 50% in fewer than four years.

Whole Foods Market is the dominant player in this lucrative space and longer-term shareholders have profited handsomely. The stock price since its November 2008 Great Recession low is up 1,300% versus 135% for the S&P 500.

Even though the company has had its share of controversy and competition from rivals such as Natural Grocers by Vitamin Cottage (NGVC), seven million shoppers still visit Whole Foods' stores every week. Its hot-food bar and extensive salad bars are a big draw, and if you're on a diet don't go near the irresistible bakery found inside almost every location.

Expectations for first-quarter 2014 EPS and sales growth are low, which may set the stage for an upside surprise or two. I'm anticipating a 10% increase in EPS from the year-ago quarter and revenue to also be up 10% year over year.

The company's full fiscal-year financial numbers should be similar. Last year it surprised to the upside on three of four quarters, and this year it needs to hit it out of the park four quarters in a row to justify WFM's high PE ratios.

Three negative factors that could hold down Whole Foods Market shares are: a dividend yield that is barely 1%, an anemic trailing 12-month operating margin of less than 7% and a profit margin of only 4.2%.

If investors ignore the stock's high PE ratio and management guides favorably on May 6, my one-year price target for WFM is $58. In the meantime, look for share price volatility to help patient investors buy below $50.

At the time of publication the author had no positions in the companies mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of
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