Whole Foods' Stock Isn't Appetizing

 | Nov 08, 2013 | 1:00 AM EST
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The natural and organic grocery chain Whole Foods Market (WFM) is a fine company. It is not immune to getting overpriced, however, and that's exactly what it was prior to Wednesday evening's quarterly report. At its recent high of $65.59, Whole Foods traded for 44.9x trailing earnings.

That P/E multiple was above what Whole Foods had commanded in the fall of 2012, right before a 20% pullback from $50.90 to $40.69. Whole Foods did get as high as 55x EPS back in 2006. Buyers back then lived to regret their purchase. The stock dropped from near $40 to a split-adjusted $3.50 during the worst of the 2008-09 Great Recession.

Over-enthusiastic buyers in 2006 had to wait about seven years just to get even.

Whole Foods has been nicknamed "Whole Paycheck" by those who see prices beyond their food budgets on the gloriously presented meats, fruits and sundries.

Buyers cut back on Whole Foods shopping during the last recession, and EPS declines followed. Profits per share were slashed from $0.71 in fiscal 2006 to just $0.41 in fiscal 2008 (the company's fiscal years end on the last Sunday in September).

After a one-year hiatus in growth during 2009, the U.S. economic recovery allowed Whole Foods to prosper again. As EPS recovered, the stock shot up by 1,774%. That put it back in nosebleed territory.

Company insiders have been cashing out their stock options over the past 12 months while simultaneously selling the shares. That occurred all the way up, with exceptional activity taking place during May and August this year.

The stock was down more than 9% overnight Wednesday night and was quoted close to that same level, at $58.65, just before noon on Thursday. It closed Thursday at $57.26. At 40.1x trailing earnings, Whole Foods is not yet a good value. The 10-year median multiple has been 34x. A regression to that normalized valuation would not support today's price, even on forward estimates for the fiscal year ending next September.

It appears that management is planning to offer better pricing throughout the stores to try to compete with privately held Trader Joe's and the greatly expanded organic food departments from commonplace competitors Kroger (KR), Safeway (SWY), Target (TGT) and even Wal-Mart (WMT).

Whole Foods' produce and meats appear more tempting than the shares, barring a further pullback.

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