By TERESA RIVAS
Whole Foods may be known for its organic produce and artisan foods, but its potential for growth is the grocery chain's most mouthwatering offering, according to Goldman Sachs.
Before Monday's market open, Goldman analyst Stephen Grambling upgraded shares of Whole Foods (WFM)
Grambling estimates that the firm will earn $1.95 this year, and that EPS will surge more than 36%, to $2.66, in 2013. "As Whole Foods demonstrates it can multi-task delivering above plan comps and profitability while accelerating store expansion, we expect double-digit EPS growth and sustained valuation to drive stock outperformance."
Grambling set a price target of $76, representing approximately 18% upside from the stock's current levels.
Shares of Whole Foods, which were trading up fractionally today to a recent $64.38, should head higher in the coming year.
While traditional grocery stores struggle with competition from dollar stores and big box retailers, Whole Foods has an enviable niche brand that attracts well-heeled consumers. As Grambling writes: "Whole Foods' differentiated offering renders it the best-in-class secular-growth story in food retail. Over the past two years, Whole Foods has demonstrated this by consistent share gains even as it has slowed square footage."
In the past, many shoppers eschewed the brand because they associated it with high prices. But the company has stepped up efforts to provide value for consumers, notes Piper Jaffray analyst Sean Naughton, who thinks the stock can reach $77. "We believe increased focus on value merchandise throughout the store with the Whole Deal, one day national sales, and lower priced-point merchandise gives the customer more choices when shopping the store," he wrote last week.
Trends toward organic, local produce and healthier eating play into Whole Foods' strategy, and the company has been successful in passing on higher-food prices to its consumers to protect margins without meaningfully denting sales.
Standard & Poor's Equity Research analyst Joseph Agnese expects that margins will continue to expand this fiscal year, thanks to "increased operating leverage and distribution efficiencies," while the company continues to pay off debt and improve its balance sheet.
Barron's has been positive on Whole Foods in the past. This column recommended shares in late 2010, a call that netted 28% upside. (See Barron's Take, "Investors Feast on Whole Foods," Nov. 4.) Although we protected investors from some downside after stepping back from the stock earlier this year (See Barron's Take "Whole Foods Too Pricey For Our Appetite," Feb. 10), it's continued to show strength.
At just under 30 times forward earnings, the stock isn't a bargain, but it deserves a premium for its 17.1% long-term expected earnings-growth rate, which handily beats the 12.7% industry average.
Earnings haven't disappointed since 2008, in the depths of the recession, and last quarter's EPS rose 33% year-over-year. The company also has plenty of free cash, a 0.6% yield and 12% return on equity.
We think Whole Foods still has toothsome returns ahead.