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Dueling Fools: Whole Foods Bull

Let's get this out of the way right now: I'm not going to try to convince you that Stock Advisor pick Whole Foods (Nasdaq: WFMI  ) is cheap. It isn't. But you know what? That shouldn't bother you.

You get what you pay for
Most often, the best we investors can do is to buy stocks that offer growth at a reasonable price. That's what we have with Whole Foods:





Whole Foods






Source: Capital IQ, a division of Standard & Poor's.

Why compare on the basis of enterprise value-to-EBITDA? Thanks to years of losses, grocers now employ wildly different capital structures. Using EBITDA discounts the effect of non-operating expenses such as interest and taxes. That, in turn, provides a truer picture of how expensive Whole Foods' stock really is.

What real growth looks like
Here, it's pretty clear that Whole Foods is the premium supplier. But I'd say the premium is well-deserved. See how each grocer has grown EBITDA over the last three years:





Whole Foods

EBITDA growth





Source: Capital IQ.

See what I mean? Whole Foods is at least on par with SUPERVALU (NYSE: SVU  ) and tramples both Kroger (NYSE: KR  ) and Safeway (NYSE: SWY  ) . But the story gets better when you look at the balance sheets:





Whole Foods

Cash & inv.

$189.3 mil

$436.2 mil

$275.0 mil

$148.0 mil

Total debt

$7,042.0 mil

$5,219.4 mil

$8,571.0 mil

$3.0 mil

Total locations





Source: Capital IQ.

A green-field opportunity
Pretty startling, isn't it? While its primary competitors -- especially SUPERVALU -- are deeply leveraged with huge store networks, Whole Foods is still in its relative infancy.

That won't last. During 2006, the U.S. market for organic foods grew to $3.7 billion, more than double what it was in 2000, and 30% greater than 2005's total.

Longer-term, the American Organic Trade Association expects average annual growth of 11% through 2025. With Wild Oats (Nasdaq: OATS  ) about to be subsumed in a $565 million deal, I expect Whole Foods to capture the bulk of that revenue.

Green is still the color of money
Which brings me, finally, to the valuation. Whole Foods probably won't continue to grow EBITDA at 20% per year. Fortunately, investors don't need it to. Remember, this stock trades for just 12.7 times trailing EBIDTA. Unless growth drops to 10% tomorrow -- and it won't -- there's a decent margin of safety here for investors who buy now.

Indeed, investors are buying now, including championship stock-picker Bob Smith of the T. Rowe Price Growth Stock fund. I'm guessing that he and others see what I see: a proven market leader, led by a very Foolish CEO, with a valuation that offers predictable growth at a reasonable price. In investing, that's about as good as it gets.

You're not done with this Duel yet! Go back and read the other arguments, then vote for the winner!

Whole Foods is a Stock Advisor pick. Discover more market-beating stocks from Tom and David Gardner with a free 30-day trial subscription.

Fool contributor Tim Beyers, ranked 1,272 out of more than 25,000 in our Motley Fool CAPS investor-intelligence database, wonders when Taco Bell will go organic. Hey, if junk food works for Warren Buffett. ... Tim didn't own shares in any of the companies mentioned in this story at the time of publication. All of Tim's portfolio holdings can be found at his Fool profile. His thoughts on Foolishness and investing may be found in his blog. The Motley Fool's disclosure policy prefers muesli to granola and Birkenstocks to Crocs.

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