Hot Stock: Whole Foods Market

Capturing the organic food market.

Whether you purchase organic foods or not, you should still consider shopping at Whole Foods Market (NASDAQ: WFM). Don’t come for the groceries: come for the growth. This organic foods store is a bright stock in the otherwise stagnant grocery store sector. It’s especially interesting for Canadians investors, who may see more volatility in our domestic grocers as competition for food dollars increases.

Brian Yarbrough, an analyst at Edward Jones, is a fan of this stock. He upgraded it to a buy about two months ago for three reasons and all have to do with growth. The first, he says, is that more people are flocking to organic foods every year. Over the last seven years the industry has been expanding by about 12% to 15% per year and he thinks it will see between 8% and 10% growth going forward. “Americans are looking for better health and wellness,” he says.

The second reason he likes the company is that it has lot of opportunities to expand its stores. Right now there are about 360 stores in the U.S., but Yarbrough says that will grow to about 1000 locations over the next decade or so. That doesn’t include expansion potential in Canada or Europe. “There are huge growth opportunities,” he says. It has been opening about 35 to 40 stores a year, but he expects that to increase to between 45 and 50.

Finally, same store sales growth continues to expand. This is a crucial metric in the grocery store business, he says. Companies can keep opening stores, but if already existing locations are losing money, then it will be impossible to grow over the long-term. Revenues at its current stores have been growing by about 8% per year and he expects that to continue.

Part of the reason for that growth is that it’s become more price sensitive than it has been in the past. While meats and fish are still costly because of the higher quality, other products are no more expensive than what you’d find in the organic section at more traditional grocery stores. “They continue to do a good job of trying to bring better value to their products and also better awareness of why you’d pay more for natural organics,” he says.

An improving economy is also good for Whole Foods. The more money people have the more they’ll consider shopping at the chain. Yarbrough thinks earnings can grow between 15% and 20% every year. That’s the main reason why the valuation is high—it’s trading at about 30 times earnings—but, in this case, growth outweighs value. “It’s not cheap, but its high earnings will drive the stock price,” he says.

Another plus is that its debt is much lower than where it was in 2009. Back then it had $900 million in long-term debt. Today, it’s only $25 million. It also has more than $1 billion in cash on its balance sheet. “It’s in very good shape,” he says.

Currently, the stock price is at about $50. Yarbrough doesn’t have a price target on it, but he says it should grow from there. Other analysts have it reaching between $54 and $58. “This is a good business,” he says. “It generates a ton of cash.”

For more investing insights, follow Bryan on Twitter @bborzyko.