Why Does This Potential Acquisition Look Like a Steal?

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

With barely a year gone by since its IPO, awkwardly named Natural Grocers by Vitamin Cottage (NYSE: NGVC) has experienced impressive stock-price appreciation and displayed solid fundamentals. Meanwhile, the company itself continues to expand at a rapid clip. Despite its relatively small size and unusual business model, NGVC is already being branded as "the next Whole Foods." Indeed, the company has made no secret of its desire to compete with Whole Foods (NASDAQ: WFM) on its home turf.

For the time being, Natural Grocers remains much smaller than its Texas-based competitor. The company currently owns about 65 stores in just over a dozen American markets. Its product lines include proprietary organic-label foods, dietary supplements, fresh produce, and organic or naturally produced dry goods and household items. While it necessarily caters to an upmarket crowd, the firm has not found it difficult to move into "Middle American" locations like Tulsa, Oklahoma. It also has a thriving e-commerce business that serves customers outside of its geographical footprint. Investors who view this firm as a Whole Foods imitator would do well to remember that it has existed in some form since 1955. 

NGVC and Other Organic Grocers

NGVC competes with Whole Foods as well as a number of other organic grocers and health stores. Although a financial comparison with Whole Foods is in order, it is important to note that Whole Foods remains the dominant player in the space. Indeed, the company's market capitalization comes in at nearly $20 billion and dwarfs that of NGVC by a factor of 25. Meanwhile, organic retailer The Fresh Market (NASDAQ: TFM) occupies a happy medium with a market cap of around $2.5 billion.

NGVC has proven that it is capable of turning a profit, albeit by a narrow margin. In 2012, it earned nearly $9 million on total revenues of $379 million. Given the competitive nature of the grocery business, this is not an unhealthy margin. During the same period, Whole Foods earned about $518 million on revenues of $12.5 billion. The Fresh Market posted a profit of $67 million on total revenues of $1.4 billion for a segment-leading margin of nearly 5 percent.

These companies do not have significant debt loads. The Fresh Market has a tiny cash reserve of $11 million to offset a manageable liability sheet of about $15 million. NGVC's debt-to-cash ratio is nearly identical. Meanwhile, Whole Foods has an impressive cash hoard of $1.1 billion and a minuscule debt pile of $27 million.

Performance Since IPO

Since its public debut in the second half of 2012, NGVC has nearly doubled in value. More impressively, the company has remained largely unaffected by the broader market's recent jitters. At its current stock price of $33.30, NGVC remains near its all-time high and looks quite sound from a technical perspective. Its recent earnings beat should provide the grocer with momentum in the coming months: After a period of consolidation, it would not be surprising to see NGVC take yet another leg higher.

Attractive Valuation, Impressive Growth Potential?

One of NGVC's most attractive attributes is its solid valuation. In light of its recent performance, it would be reasonable to expect NGVC to sport an extremely high price-to-book ratio and show other signs of an inflated valuation. The reality is different: Although the company's price-to-book ratio of 9.5 appears to be high, it looks like a bargain next to The Fresh Market's 11.1 figure. Meanwhile, more mature Whole Foods has a still-elevated price-to-book figure of 5.4. Although Whole Foods is also blessed with exciting growth prospects, it seems curious that the much more promising NGVC has a ratio of less than double that of its peer. NGVC's PEG ratio is also an encouragingly low 1.25.

While its valuation is clearly attractive, NGVC faces a promising future that could make it look like a true bargain at its current levels. After years of snail-paced organic growth in its Colorado home market, the company has broken out and looks poised to mount a nationwide expansion during the coming years. In its market-beating earnings report, NGVC cited strong demand for organic foods and supplements as a driving force behind its plan to expand its footprint by about 20 percent by the close of the fiscal year. 

Moreover, NGVC appears to have found a middle ground between bulk organic retailer Trader Joe's and overly fancy Whole Foods. While its products clearly cater to folks with disposable income, NGVC's stores have a back-to-basics feel that appeals to "true believers" and cash-strapped students as well. This will bode well for the company's expansion in the rural market towns and suburban communities for which cost and value are so important. 

Invest or Stay Away?

Given the strength of its to-date success and the scope of its expansion plans, NGVC could offer a compelling thesis for long-term investors. While its unique business model and built-in customer base make it an unlikely takeover target for Whole Foods, it may yet emerge as a pickup for The Fresh Market, Trader Joe's or another natural grocer. As such, investors would do well to take a close look at NGVC. If its post-IPO performance is any indication, its stock might not remain at these levels for long.

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Mike Thiessen 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!

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