The big news today for Wild Oats Markets
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One of the hottest stocks on Wall Street -- and a Motley Fool Stock Advisor recommendation -- is Whole Foods Market
Consider this long-term chart of Whole Foods compared to Wild Oats. Whole Foods investors have steadily bagged a lot of greenbacks, while Wild Oats' stock has gone up, down, and ultimately nowhere in particular.
Its lack of success can be explained by its lack of meaningful earnings. From April 2004 to March 2005, Wild Oats lost $1.72 a share. Ouch! The quarter before last saw the company's fortunes improve slightly, as it earned $0.03 a share. But last quarter, the company earned just $82,000. In the company's results, that pittance doesn't even round up to a single penny of per-share earnings.
What can Fools learn from Wild Oats? First, owning the No. 2 company in a hot sector isn't necessarily an automatic win. Over the last two completed fiscal years, Wild Oats has grown sales by just 14%. Worse yet, trailing-twelve-month operating margins of 0.03% show that its revenues just haven't trickled down to the bottom line.
Second, poor performance doesn't always lead to a stock being undervalued. Analysts remain optimistic about Wild Oats' future, expecting the company to compound earnings by 15% a year for the next five years. Even so, the stock trades for a hefty 42.2 times next year's projected earnings.
The final lesson is that is pays to watch operating margins. Whole Foods' trailing annual operating margin of 5.2% exceeds the supermarket industry's 3.1% average. It's capitalizing on its position in a hot sector -- and Wild Oats, with its puny 0.03% trailing margins, is not.
Whole Foods' healthy margins help to give it an uncharacteristically strong balance sheet, with net cash (cash minus debt) of $289.7 million and a 1.4% total debt-to-equity ratio. Compare that to debt-heavy competitors Wild Oats, Kroger
Wild Oats is a troubled company selling at a strong future multiple to earnings. Yes, it's in a hot segment, but it's failing to capitalize on that advantage. Investors would be wise to sow their investment dollars elsewhere.
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