Why This Grocer Could Make You a Whole Bunch of Money

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over the last six months, shares of Whole Foods Market (NASDAQ: WFM) have fallen 18.8%. But this company's earnings growth and potential rewards far exceed its risks, suggesting that its current sell-off could be overblown.

The fall from $100.45 to $81.50

<img alt="" src="http://g.fool.com/editorial/images/30611/screen-shot-2013-04-08-at-95815-am_large.png" />

Shares dropped 9.7% on Feb. 14 after the company updated its 2013 guidance. Management said it expects revenue growth between 10% and 11%, which lagged previous expectations of 10% to 12%. In addition, Whole Foods expects 2013 revenue to land around $12.87 billion to $12.99 billion, narrowly missing analyst estimates of $13.2 billion. 

While that guidance may have justified the stock's initial drop, I don't think it's bad enough to explain shares' continued fall. Here's why this sell-off might offer you a great investment opportunity. 

A year in review

America's switch to healthier foods is in full swing, and Whole Foods is the poster-child for how to do it. It seems like anything you find in your local supermarket is the evil twin of a product on Whole Foods' shelves.

2011 was a year of immense growth for the organic grocer, and 2012 far exceeded it. In fact, it was the best year in the company's 32-year history. Take a look at the highlights from the annual report, compared to 2011:

  • Earnings per share increased 30.6% to $2.52
  • Revenues increased 15.8% to $11.7 billion
  • Same-store sales increased 8.4%
  • 31% rise in the stock compared to 13% by the S&P 500
It is clear that the company was firing on all cylinders in 2012. It was due to slow down at some point, but that does not mean we need to run away and hide from the stock. I believe Whole Foods has another year like 2012 in it, and I want to be a shareholder when it happens.

Projections going forward

Whole Foods is set to experience impressive growth through 2015. Even if 2013 ends up below expectations, I believe the company's long-term outlook will remain strong. Take a look at its growth over the years, and the projections going forward:

<img alt="" src="http://g.fool.com/editorial/images/30611/chartgo_1_large.png" />

  • 2013: 13.9% growth
  • 2014: 18.5% growth
  • 2015: 19.1% growth
The natural and organic food space is growing at an impressive rate. Rival Kroger's CFO stated that natural foods are growing at a double-digit pace in its stores, so I can only imagine what Whole Foods is experiencing. Recent controversies over bird flu in China and horse meat in Europe are encouraging more people in the United States that they need to buy natural foods. So are TV shows like "Dr. Oz," which promote healthier living -- and products often available at Whole Foods -- to an eager audience.

Industry competition

The booming market Whole Foods enjoys is attracting rivals hungry for their own slices of the organic food segment.

The Fresh Market (NASDAQ: TFM) is one of Whole Foods' most notable competitors. It has been hammered this year as well, down 17%. In its fourth-quarter report, it missed both earnings per share and revenue estimates, sending shares tumbling. Worst of all, guidance for 2013 fell well below analyst estimates. The Fresh Market predicts earnings per share for 2013 between $1.51 to $1.58; analysts had expected $1.68. The company does plan to open 19 to 22 new stores in 2013, but that's not enough to get me interested just yet. I do not see a threat to Whole Foods' growth here.

A smaller competitor and more speculative stock in the industry is Natural Grocers by Vitamin Cottage (NYSE: NGVC). This stock is actually up 12.8% for the year, well outperforming Whole Foods and The Fresh Market.  Natural Grocers has been growing and expanding very fast and has the earnings to back it up. Take a look at 2012 highlights compared to 2011:

  • Earnings per share increased 89.5% to $0.36
  • Revenues rose 27.2% to $336.4 million
  • Same-store sales increase 11.6%
This company is expected to experience immense growth over the next few years. Earnings per share are projected to reach $0.79 in 2015, a 119% increase from 2012. I see endless potential for Natural Grocers if it continues to expand at its current rate. More importantly, I want to watch closely and see if it can continue to deliver double-digit same-store sales. If it can do both, I think it could rival Whole Foods' size within 10 years.

The Foolish bottom line

I see a huge potential for profit in Whole Foods Market. The stock has been oversold in 2013 and the potential reward outweighs the risk at this point. I am also a fan of Natural Grocers by Vitamin Cottage as a more speculative pick. Either of these companies could fulfill your portfolio's need for growth going forward.

Joseph Solitro has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of 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!

blog comments powered by Disqus