What business is Whole Foods Market (WFM, Financial) in? Selling safe, healthy food.
Who today doesn't want to eat organic? In today's world people are becoming conscious of what goes into their food. Whole Foods has some of the largest stores in the country; with more than 400 stores, Whole Foods is hard to miss if you are a disciple of natural and organic. In fact, Whole Foods is the eighth-largest food and drug store in the U.S.
Yes, when you think organic food you likely think Whole Foods. Whole Foods only allocates capital to its core businesses, organic and locally grown food. Although the company is experiencing an increase in competition from companies such as Sprouts Farmers Market (SFM, Financial), can they stop the decrease in their market share and soar again? While shareholders have a negative outlook, investors such as Ron Baron (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) have been buying.
Looking at how the company is financed shows the company has only a 0.01 long-term debt-to-equity ratio, which is conservative, given its size and history of rising earnings.
Checking out Whole Foods' EPS indicates that it has been growing at a rate of 12.23% compounded annually for the period of 2005 to 2015, and at a rate of 7.70% for the last five years. Earnings can be considered consistent, increasing eight out of the past 10 years.
A glance at the yearly EPS chart below shows it is strong and has an upward trend, which is what every investor wants to see.
2005 βΓ 52 cents
2006 βΓ 69 cents
2007 βΓ 59 cents
2008 βΓ 37 cents
2009 βΓ 48 cents
2010 βΓ 80 cents
2011 β $1.04
2012 β $1.32
2013 β $1.50
2014 β $1.60
2015 β $1.68
Recently the company announced it plans on buying back $1 billion in stock. The way management has spent the retained earnings of Whole Foods has helped increase its EPS as well, but it has also increased shareholder value. From 2005 to 2015 the company had retained earnings of 29 cents per share. EPS grew by $1.15 per share, from 52 cents per share at the end of 2005 to $1.68 currently. So the retained earnings of 29 cents per share produced in 2015 an after-corporate-income-tax return of $1.15 per share, and equals to a rate of return of 25.20%. This shows that retained earnings are being profitably used, and at the same time increasing EPS. This has most likely caused the increase in the market price for Whole Foods stock, from approximately $20 a share in 2005 to approximately $30 in 2015.
As of January, the average return on equity for a public company this year is 14.49%. The return on equity for Whole Foods Market for the last 10 years looks like this:
2005 β 11.95%
2006 β 14.39%
2007 β 11.51%
2008 β 7.21%
2009 β 10.11%
2010 β 12.13%
2011 β 13.07%
2012 β 14.02%
2013 β 14.97%
2014 β 15.04%
2015 β 15.44%
This gives you an average annual rate of return on equity for the last 10 years of 13.98%. More significant than averages is the fact that the company has consistently earned high returns on equity, showing that Whole Foods management excels at profitably using its retained earnings.
Whole Foods has not been able to keep its prices where they need to be. A company needs to have the ability to raise prices with inflation and have the demand for those products remain unaffected. Instead, Whole Foods has been lowering its prices to generate sales.
Whole Foods had EPS in 2015 of $1.68 per share. Divide $1.68 by the interest rate on long-term government bonds (Treasury bonds) in 2015, approximately 4.66%, and you get a relative value of $36.05 per share ($1.68 / .0466 = $36.05).
In 2015 you could have bought a share of Whole Foods for as little as $28.73 per share and for as much as $57.57 per share. Since 2015 EPS are $1.68 per share,Γ your initial rate of return would be between 2.9% and 5.8% if you paid between $28.73 and $57.57 per share.
Looking at Whole Foods' EPS growth rate for the last 10 years shows that it has been growing at an annual compounding rate of 12.44%. So ask yourself what would you rather own βΓ a Treasury bond with a rate of return of 4.66% or a share of Whole Foods with an initial rate of return of 5.8% that is increasing at an annual rate of 12.44%
