Whole Foods Market Inc. (WFM) Quarterly Valuation – April 2014
Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Low PEmg Companies for the Defensive Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Whole Foods Market (WFM) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Whole Foods Market, Inc. (Whole Foods Market), is a retailer of natural and organic foods. The Company operates in one segment: natural and organic foods supermarkets. As of September 29, 2013, it operated 362 stores in the United States, Canada, and the United Kingdom. The Company’s stores average 38,000 square feet in size and are supported by its Austin headquarters, regional offices, distribution centers, bakehouse facilities, commissary kitchens, seafood-processing facilities, meat and produce procurement centers, and a specialty coffee and tea procurement and roasting operation. In February 2014, Whole Foods Market Inc acquired leases from Safeway Inc for seven locations formerly operated as Dominick’s stores.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary
Key Data:
| MG Value | $51.98 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $19.58 |
| Value Based on 0% Growth | $11.48 |
| Market Implied Growth Rate | 14.51% |
| Net Current Asset Value (NCAV) | $0.85 |
| PEmg | 37.52 |
| Current Ratio | 1.78 |
| PB Ratio | 4.76 |
Balance Sheet – 1/14/2014
| Current Assets | $2,075,000,000 |
| Current Liabilities | $1,166,000,000 |
| Total Debt | $31,000,000 |
| Total Assets | $5,720,000,000 |
| Intangible Assets | $745,000,000 |
| Total Liabilities | $1,757,000,000 |
| Outstanding Shares | 372,290,000 |
Earnings Per Share
| 2014 (estimate) | $1.59 |
| 2013 | $1.47 |
| 2012 | $1.26 |
| 2011 | $0.97 |
| 2010 | $0.70 |
| 2009 | $0.42 |
| 2008 | $0.41 |
| 2007 | $0.64 |
| 2006 | $0.70 |
| 2005 | $0.49 |
| 2004 | $0.51 |
Earnings Per Share – ModernGraham
| 2014 (estimate) | $1.35 |
| 2013 | $1.14 |
| 2012 | $0.90 |
| 2011 | $0.69 |
| 2010 | $0.56 |
| 2009 | $0.50 |
Dividend History
WFM Dividend data by YCharts
Conclusion:
Whole Foods Market is suitable for Enterprising Investors but not Defensive Investors.  For Defensive Investors, the company’s current ratio is too low, it does not have a strong enough dividend history, and its PEmg and PB ratios are too high.  The company passes all of the requirements of the Enterprising Investor.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company while also comparing it to other opportunities through a review of 5 Undervalued Companies for the Enterprising Investor and other screens found in MG Stocks & Screens.  From a valuation perspective, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.56 in 2010 to an estimated $1.35 for 2014.  This demonstrated level of growth supports the market’s implied estimate of 14.51% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Whole Foods Market (WFM)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Whole Foods Market (WFM) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.
