3 Reasons To Buy This Health Food Giant
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The secular health trend helps Whole Foods (NASDAQ: WFM) outperform other grocery stores, but health food suppliers also offer opportunities to profit from this trend. Hain Celestial (NASDAQ: HAIN), United Natural Foods (NASDAQ: UNFI), and Annie's Homegrown (NYSE: BNNY) all sell some of the food that shows up on Whole Foods' shelves. Whole Foods could be a better investment than these alternative health food plays for three reasons.
Price to Free Cash Flow
The price to free cash flow metric shows that Whole Foods is fairly priced in comparison with other health food companies. The Fool lists a P/FCF of 23.30 for Whole Foods. Hain Celestial looks slightly more pricy than Whole Foods right now, with a P/FCF of 24.40, but this isn't a big difference. Annie's actually has negative free cash flow right now, so its P/FCF comes out negative. With a 136 P/E, Annie's would face a tough comparison here even if it achieved positive cash flow. United Natural Foods does beat Whole Foods on this measure, with a P/FCF of 19.20, although this metric alone doesn't make United Natural Foods a bargain.
A gross margin comparison shows that Whole Foods is a price maker, not a price taker. The grocer's 38.1% gross margin surpasses other companies in its supply chain, and its five year average gross margin of 37.6% demonstrates sustainability. Annie's 34% gross margin does come close to Whole Foods' figure. Hain Celestial's 29.5% gross margin comes out lower, possibly because of a different product mix than Annie's. Hain Celestial sells a very wide range of products that include tea, chips, and personal care items. United Natural Foods reports an 18.2% gross margin, less than half of Whole Foods' figure, so both health food stores and health food producers could be squeezing this distributor's margins. Whole Foods' strong margins give it an option that many smaller health food companies don't have right now, dividend payouts.
Whole Foods, Hain Celestial, and United Natural Foods all traded much lower during the last recession. In early 2009, United Natural Foods traded below $14, Whole Foods traded slightly above $8, and Hain Celestial traded slightly above $14. All three companies have grown since then, and so has the health food market, but investors may still wonder which health food company offers the most to long term investors if the market weakens. Whole Foods' dividend payments could make the difference here, since United Natural Foods, Annie's and Hain Celestial don't pay dividends. Whole Foods did cut its dividend during the last recession, restating it in 2011, but a recent announcement suggests that the grocer has more confidence in its dividend payment abilities now. When Whole Foods announced its 4Q 2012 financial results, it also announced a dividend hike from 14 cents to 20 cents per share.
The price to free cash flow measure shows that any pure play health food investment isn't cheap right now, but Whole Foods' financial advantages over other health food companies don't result in an additional premium. Whole Foods' gross margin is a big selling point, since it shows that the grocer can pass on rising supply costs. Whole Foods' dividend adds some extra security and clearly differentiates this supermarket from other health food companies. Whole Foods still looks like a great way to invest in the health food sector.
Eric Novinson owns shares of Whole Foods Market. The Motley Fool owns shares of Hain Celestial and Whole Foods Market. Motley Fool newsletter services recommend Hain Celestial and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!