I recommend we buy Whole Foods stock, which is currently undervalued. Their stock is currently selling for $39.22, but they are valued at $42.96. Current equity owners are being adequately compensated for their risk, with regular and increasing dividend payouts and two for one stock splits. They are financially a strong company, with low debt and large cash reserves to fund their future expansion plans. After examining Whole Foods financial history, they have successfully grown at an exponential rate, with a strong focus in expansion and sales growth. As the leaders in a very competitive market Whole Foods success will continue with their efficient management team and ability to raise new capital.
Whole Foods Market’s has a history of significant annual sales growth, with nearly $13 billion dollars in sales during the fiscal year 2013, a 10.4% increase from 2012. Of which 93.5% of the growth was from identical store sales (6.6% increase from the previous year) and the remained growth was from acquisitions and opening new stores. They reported $551 million in net income, displaying a 24% increase from the prior year. A majority of this increase was due to the sales growth, with a minor increase in gross and operating margins, which includes a $4 million interest elimination. Whole Foods paid off the outstanding $490 million loan for the acquisition of Wild Oats Markets, leaving them with no outstanding long-term debts as of their fiscal year 2013.
A record 32 new stores were opened during fiscal year 2013, expanding into 10 new areas and increasing their square footage by about 8.2% to almost 13.8 million square feet. Of the $1 billion cash flow growth from operations $537 million were invested in capital expenditures, $339 of which was associated with new locations. Along with a quarterly dividend increase, five dividend payments were made to the common shareholders totaling $508 million, which includes a $371 million special onetime dividend. Whole Foods repurchased $125 million in common stock during fiscal year 2013. They also had cash, restricted cash, and investments totaling $1.4 billion at the end of the fiscal year.
According to the ratio comparison between Whole Foods Market and the industry average, Whole Foods is financially a strong company. They have high liquidity, with sufficient cash flow to cover future debts and projects, and they are able to maintain their profitability with an efficient management team. Their average net profit margin advocates their ability to remain profitable while their extraordinarily high ROA ratio implies that they efficiently use their assets to create new income. As a result equity owner are being adequately compensated for their risk so they will continue to support management. The current and quick ratios allows for solvency and liquidity, with adequate cash flow to pay its bills, and cover short term cash needs. Whole Foods has very high inventory turnover for the industry, which displays the managements efficient inventory ordering and cost control procedures. Whole Foods fixed asset ratio indicates that management efficiently generates sale from their fixed assets. However they do have low total asset turnover and debt to asset ratios but these are probably due to the cash reserves they are holding to purchase new properties in the future. The above ratios suggest that Whole Foods has the ability to raise a significant amount of capital through sales growth, loans, leases, stocks, and bonds. Not only are they a growing company, which means that their annual identical store sales, net income, and operating income will continue to increase, but they also plan on opening 33 to 38 new stores in 2014 while reducing operating expenses to maximize wealth. For 2014 they expect an 11-13% growth in sales, 5 - 6.5% identical store sales growth, while general and administrative expenses as a percent of sales are expected to remain at