Add This Grocer to Your Portfolio for Healthy Returns
usha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Organic food is “in” now. Consumers are becoming more health conscious and are preferring organic and natural-food products over fast food. The organic food industry has been growing rapidly by 10% every year, contributing more than $30 billion to the U.S. market alone. This is certainly good news for the undisputed king of organic food grocers--Whole Foods Market (NASDAQ: WFM). Shares of Whole Foods increased by around 10% on May 7 as the company announced strong second-quarter earnings. Below, I have listed two reasons why investors should add this organic grocer to their portfolios.
1. Expansion plans
Whole Foods has solid expansion plans in order to increase its market share. It plans to increase its stores count from 349 to 1,000. The company acquired the leases of six Johnnie's Foodmaster stores in the greater Boston area last year and has also been exploring untapped areas like Maple Grove, Minn. and Detroit. It continues to demonstrate a high return on invested capital, even in its oldest stores, and has also reported a 19% return on invested capital in the second fiscal year of a new store opened. The new store openings will help Whole Foods increase its brand recognition in the markets and will boost economies of scale.
2. Solid financials and a shareholder friendly company
Whole Foods recently reported second-quarter results in which its comparable sales increased by 6.9% and revenue increased by 13.4%. Whole Foods has been experiencing rising revenue and shares. Its revenue increased from approximately $9.4 billion in December 2010 to $12.5 billion in March. In 2012, the company experienced a 19% increase in its free cash flow. With almost negligible long-term debt, the strong financials makes it attractive to investors.
Whole Foods is a shareholder friendly company—continuously rewarding its investors. In the first quarter this fiscal year, its board announced an increase in its quarterly dividend by 43% to $0.20. The company also announced a new share-buyback program of $300 million by December 2014.
The awareness and demand for organic food has been on the rise, and as a result this industry has become heavily competitive. Natural Grocers by Vitamin Cottage (NYSE: NGVC) and The Fresh Market (NASDAQ: TFM) are some key players of this industry.
With around 130 stores, The Fresh Market has been focusing on expansion. It opened around 16 stores last year and has plans of opening around 22 stores in this fiscal year. In its latest earnings report, it beat analysts' expectations and reported a 15% increase in profits and 13% increase in sales.
The stores count of Fresh Market is half that of Whole Foods, and the stores are also smaller in size. Fresh Market has increased perishable products in its product mix and has also been improving its in-store customer services. It has a one-year forward P/E ratio of 26, slightly lower than Whole foods 32. Fresh Market has tremendous growth opportunities available, which will definitely reap long-term returns.
Natural Grocers is run by the Isely family and has over 60 stores in 13 states. Even though it has been in the organic business for longer than Whole Foods and The Fresh Market, it is not very focused in its expansion plans.
In the company's latest earnings report, it reported a 25.4% increase in its revenue. For this quarter, same-store sales grew by 10.4%. Even though its shares have skyrocketed, its valuation doesn't make it look attractive. The following table makes a comparison in the valuations of two companies:
Whole Foods has a higher gross margin as compared to Natural Grocer. With a lower PEG ratio and a lower forward P/E ratio, Whole Foods is better valued. Natural Grocer looks slightly overvalued to me.
Foolish bottom line
Rising healthcare costs have become a huge concern for the consumers today. A gradual shift toward organic food and a healthy diet has been gaining momentum. Solid expansion plans, great operating performance and increased demand for organic food definitely makes Whole Foods a good investment. Add this stock to your portfolio and earn healthy returns.
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usha patodia 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!