A few weeks back, I told you why I bought Whole Foods Market, Inc. (NASDAQ:WFM).
My conclusion was that it wasn't cheap. It was a Buffett and Munger stock.
i.e. fair price for a great company.
Here's another look by OSV author Dan Myers.
It's cheap to him and he shows you why.
Is Whole Foods Market cheap to you or not?
Why Whole Foods is Cheap. Take Advantage of Mr Market's Panic.
Whole Foods Market, Inc. (NASDAQ:WFM) is cheap with long term growth. Mr Market is overreacting and the current price is a great time to buy.
Whole Foods is one of those companies that has made me a better investor and person because I took the time learn about the company.
I am not the one that does the shopping in my house and I am certainly not the dietician in my house.
I eat a lot of garbage.
So this weekend, I was going through an informal screen, A.K.A goofing around in the web.
I found a list of debt free companies.
I’ve seen these lists before and started to scan. Most of the companies on there I like, but are just flat out too expensive.
However, I saw Whole Foods Market, Inc. (NASDAQ:WFM) on the list. I found this odd and I also remembered an article coming out from OSV about Whole Foods. I honestly didn’t read beyond the title.
I was intrigued.
I went back and reread the thesis. Here are the 3 ideas I got from it:
- Wal-Mart Stores, Inc. (NYSE:WMT) is not a threat
- CAPEX is evenly mixed between maintenance and growth
- The company is only beginning to ramp up its growth plans
The conclusion was that Whole Foods Market, Inc. (NASDAQ:WFM) was fairly valued and is one you should just buy and sit on for the long haul.
After doing some more digging, I have to disagree.
This company is undervalued and this is a prime time to buy.
Why I Bought Whole Foods Market
There are 3 things I found that made me want to buy.
- No Debt
- Growth is slow now compared to their goals
- They have a pioneering culture
No Debt: The Only Way I Shop
I’m going to continue to beat on this idea. Companies with no debt are more financially nimble and able to focus on shareholder value, not banker value.
Whole Foods Market, Inc. (NASDAQ:WFM) has no long term debt.
This is from ValueLine:
The only long term obligation is $31 in capitalized leases. Their leases are all in their operating expenditures.
Also, with the stock price taking a hit, they are poised to buy back shares at this discounted rate. That certainly helps reduce the risk as a shareholder. Cash Flow is actually free and not promised to the bank.
The downside to no debt is that Whole Foods has had to dilute its shareholders a little. Whole Foods has sold shares on net for about $1.3B over the last 10 years. The worst part is that it sold over $400M of that in 2009 when the stock was at its lowest.
This is a concern and is dilutive to the shareholder base.
The Growth Story is Only Just Beginning
In 2014, Whole Foods is expected to open another 33-38 new stores. Currently, it has about 360 stores.
Per this Forbes article, Whole Foods Market, Inc. (NASDAQ:WFM) wants to open an additional 1,000 stores in the next decade. Granted, these stores will be smaller, but that is almost tripling in size in a decade.
For arguments sake, let’s say the new stores are 50% the size of the existing portfolio. That is the equivalent of 500 same size stores in a decade. That would be 50/year. Whole Foods is currently at 33-38. It needs about another 33% bump in our current build rate to meet that goal.
Whole Foods Market, Inc. (NASDAQ:WFM) is accelerating the growth without getting ahead of itself.
Also, Whole Foods hasn’t had to finance its expansion in several years. It has all been done organically (there is a pun in there somewhere).
If I use 50/year, that comes to an annual 9% growth rate in store equivalents. This is just store growth. I haven’t discussed additional customers per store.
The trend is clear that people want to eat healthier. This expands their market and another 2% growth rate in same store traffic is reasonable as more people decide to eat healthier.
One new Whole Foods Market, Inc. (NASDAQ:WFM) shopper for every 50 in an existing store sounds reasonable just on population growth.
Additionally, factor in price inflation.
The food industry is going through an inflationary time. The question for grocers is whether or not they can pass on the price increases they are seeing to their customers. If a company can pass along their inflation, then you can tack inflation on to their growth rate.
I look at gross margins for this metric.
Whole Foods Market, Inc.