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I'll be the first to admit it: Whole Foods (Nasdaq: WFM ) has had a great run over the past two years, and it's a little pricey today. But in an effort to emphasize the "motley" in Motley Fool, I'm going to take fellow Fool Jacob Roche to task, as he persuasively argued that the company was no longer worth his CAPS confidence. I beg to differ, and I'll show why.
The bear case
Make no mistake about it: The investing metrics are definitely on Jacob's side -- and the side of any value investor, for that matter. Here's a rundown of why Jacob doesn't think Whole Foods is worth your investment dollars anymore:
- The company's P/E is almost 40, while the rest of the grocery sector is hovering around 16.
- The company's PEG ratio sits at 1.38, while the rest of the sector sits at an undervalued 0.93.
- The company's enterprise-value-to-free-cash-flow metric sits at 24 -- not surprisingly above the industry average of 21.6., and well above the measly 15 that that the big three grocers -- Safeway (NYSE: SWY ) , Kroger (NYSE: KR ) and SUPERVALU (NYSE: SVU ) -- currently post.
I did some research, and I have to say, Jacob's done well with his pick, too -- his initial bullish call on the company was up almost 150% when he ended it, versus a market return of just 9%.
Why the bears will eventually be wrong
There's certainly a chance that over the next year or two, Whole Foods may underperform the market. But over the next five to 10 years, I have little doubt that the company will outperform, and I've put my money where my mouth is.
My reasoning is quite simple: I believe that under "normal" circumstances with "normal" companies, Jacob's valuation and decision to end his CAPScall makes total sense. Unfortunately for the bears, I think anyone who frequents a Whole Foods would tell you that this situation is anything but normal.
First of all, and most importantly, I simply don't think it's fair to group Whole Foods in the same company as Kroger, Safeway, SUPERVALU, and the like. The comparison with other grocers, though, is the basis for Jacob's argument.
Though Whole Foods has redefined the grocery-shopping experience, it is far more than just a grocer -- it's a leader in helping Americans redefine their relationship with food. The company's auxiliary programs are helping to educate the next generation about sustainable food.
And with Whole Foods' acquisition of Wild Oats in 2008, I simply don't think Safeway, Kroger, or SUPERVALU stores have the same kind of sway that Whole Foods does in the organic market. Sure, The Fresh Market (Nasdaq: TFM ) may be trying to play Whole Foods' game, but as Jacob pointed out, TFM "only managed $481 per square foot in 2010" -- compared with Whole Foods' impressive $804 per square foot.
Furthermore, the organic movement is growing in ways that astound. Consider the facts for the past 12 years.
Total Food Sales
Organic Food Sales
Source: Organic Trade Association. Sales numbers in millions.
Right now, the big three grocers account for more than 6,500 stores -- an astounding number. Whole Foods, on the other hand, has just over 300 stores -- an astoundingly low number, when you think about it. The company has a stated goal of 1,000 stores total, but there's no telling where demand may take that figure.
Finally, as I've shown, the organic food Whole Foods offers is cheaper than what others have to offer. As consumers get more and more educated about the benefits of healthy, organic eating, Whole Foods can be the cheapest option out there.
Investing in big ideas
I think an investment in Whole Foods is akin to an investment in the organic movement -- a big idea I'm willing to bet my money, and my All-Star profile, on.
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