This Grocer's Stock Will Double in Two Years

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

Before I reveal to you the stock that's likely doubling in two years’ time, I want you to make sure that you recognize the logo below, because if you don't then you're missing out on a huge phenomenon taking place, as of now, in the North Americas and slowly in the world beyond.

The logo represents the products that the US Department of Agriculture (USDA) has certified as 95% or more organic (to know more about the logo and organic foods, click here). As health concerns rise amongst the affluent and the middle class, a new trend of buying organic food and supplements is starting to ensue. Since organic products are slightly more expensive than their non-organic counterparts, the trend of 'going organic' apparently feels more like a status symbol to me than just a health concern.

One company that's perfectly positioned in this new, fast-growing industry is, take a deep breath as I unveil the name to you, Natural Grocers by Vitamin Cottage (NYSE: NGVC). Ta-da!

Natural Grocers is a 57 year old specialty retailer of natural and organic groceries and dietary supplements. The company provides high-quality organic products at affordable prices as well as nutrition education through community outreach programs. What makes it different from other grocers is its extensive use of free educative programs to inform its customers of health and nutrition related issues. The NGVC stock got IPO-ed at $16 in July this year and unlike the bitter Facebook debacle that took place around the same time, NGVC had a positive investor reception and reached new highs of $25 by October. The stock is currently trading at an 18% premium to its IPO price. With a market cap of only $424 million, this is one stock you want to ramp up your portfolio with, before the Wall Street hounds pick up its scent and start driving the price further up. 

EDLP: The Wal-Mart Factor

What's striking about the company is the commonality of one of its core founding principles with Wal-Mart's (NYSE: WMT)--'Every Day Low Pricing' (EDLP). Sam Walton's basic ideology that laid foundation of the biggest retailer in the world was to provide affordable prices to customers on daily use items. This is primarily what helped Wal-Mart grow from a garage store to what it is today. Natural Grocers claim to work on the same principle. What further makes it distinct from its bigger, more established competitors, Whole Foods (NASDAQ: WFM)Kroger (NYSE: KR)Safeway (NYSE: SWY) and the like, is its strict focus on healthy foods, organic agricultural produce, and wellness vitamins and supplements.

You'd find it interesting that Natural, by choice, doesn't sell indulgent and seemingly more in-demand food items like processed chocolates, artificially flavored or colored snacks, and even wine and alcohol. Natural also doesn't hold supplements that contain artificial sweeteners, like NutraSweet. Here's a complete list of things that Natural Grocers doesn't sell and why. Natural Grocers' 2012 sales mix looked something like this:

 

With retailers like Supervalu going private after losing quarter by quarter and Safeway following suit, Natural Grocers may now be getting well-positioned to fill these vacancies by being better adept in changing times and trends.

More than half a century old, I still find the company in its growth phase. Natural Grocers currently operates only 60 stores across 12 states in the US. The company has recently signed leases for six more stores that will be opened by spring 2013. For the full year 2013, a total of 12 stores are planned to be opened. The company successfully opened 10 stores each year for the past two pre-IPO years (see graph below). Analysts believe that the US alone can support a store count of up to 1100 Natural Grocers stores. Looks like the management has only started to warm up. Additionally, check out this specialty retailer's comparable stores sales growth for the period before and after the Great Recession. Company outlook for 2013 CS sales growth, despite the pending fiscal cliff bad news, hovers between an attractive 7.5%-8.5%. Bear in mind, specialty retailers are more prone to macroeconomic factors, like health of the economy and buyer purchasing power, than others. 

 

Natural's biggest competitor is Whole Foods which also offers a line of organic products and is more widespread than Natural Grocers. However, as the company expands its foothold around the US and builds its brand image of a specialty 'organic-only' retailer via strong community participation, I don't see Whole Foods Market as being that serious of a direct threat. 

Another great thing about the company is its top management, most of whom belong to its founding family and thus show a greater sense of belongingness towards the company. Natural Grocer's CEO and Chairman, Kemper Isley, is also a member of Natural Grocer's founding family of the Isley's and has been a part of the company for 35 years. He started off as a store and later warehouse manager and hence knows the company inside out. 

Financially speaking, the company looks just as healthy. The company, as of its latest quarter, has cash of more than $17 million on its balance sheet, up from last year's pre-IPO same quarter holding of only $355k. Long term debt which stood at $15.7 million last year has been fully paid down to zero with the IPO funds. Current assets are more than twice the current liabilities (current ratio = 2.3). EPS for the fiscal year 2013 is expected to be $0.47, up 52% from FY12's $0.31. Revenues for the fiscal year 2012 were $336 million, up 27% from FY11's $264.5. Return on equity and assets is amongst the best in industry peers. 

  Natural Grocers Whole Foods Kroger Safeway
ROE 16.8% 13.7% 16.9% 14.3%
ROA 7.5% 9.8% 6.5% 4.7%

Investor sentiment is generally bullish on the stock but it is important to note here that the stock has received a 50% increase in short interest in the last half month, with 12.4% of its float short at the moment. 

The Foolish Bottom Line: It's time to ride the 'organic' revolution 

Almost every other American today takes some sort of vitamins or dietary supplements. Also, with the rising awareness (and trend) of organic foods, Natural Grocers, I believe, has a long way to go. The company has only recently started building on its moat. Its commitment to cheaper pricing, gradual expansion across the country, extensive participation in community awareness on healthy diet and expanding target market from organic food lovers to those who take vitamins to pet owners, all point to a great potential upside for NGVC.

Invest wisely!


All numbers on NGVC have been gathered from company website or SEC filings. PalwashaS has no positions in the stocks mentioned above. The Motley Fool owns shares of Whole Foods Market. Motley Fool newsletter services recommend 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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