Wild Oats Finally Blossoms

OK, I admit it. Last quarter, I gave up on Wild Oats Markets (NASDAQ:OATS). Today, it's surprising me and many others with its strong fourth-quarter results. The stock was up 16.1% in late Thursday afternoon trading. But even so, I am still not convinced that these shares deserve investors' consideration.

Natural- and organic-food retailers have received a lot of attention because of Motley Fool Stock Advisor recommendation Whole Foods Market (NYSE:WFMI). It has grown earnings by 19.6% a year for the past five years -- and it's been a six-bagger stock over the same period. The outlook for continued 20% compounded annual growth allows Whole Foods to trade at a robust 61.8 times earnings.

Wild Oats, meanwhile, is reporting that same-store sales were up 4.2% in the fourth quarter, and up 3.8% for all of 2005. That strong showing allowed the company to earn $0.11 a share for 2005, beating the average analyst earnings estimates by a nickel. Wild Oats is also optimistic about 2006 -- it expects same-store sales to increase 4% to 5% and anticipates earnings to land between $0.34 and $0.40 a share -- well above the $0.28 a share analysts were forecasting.

Increasing gross margins are helping earnings. The company projects that margins will be approximately 30% in 2006, up from 28.3% in 2004 and 29.1% in 2005. Yet as good as those numbers sound, they're still below the 35.1% reported by Whole Foods for its most recently completed fiscal year.

For now, Wild Oats is making the right moves. It is closing some of its older, smaller stores, remodeling other older locations, and planning to add 10 new stores in 2006.

But do the math. At the high end of guidance, the stock is trading for 42.4 times earnings. That's rich for a company that has, at best, been the runner-up in an exciting growth niche of the grocery-store industry. Speaking of second place, the company is expected to grow earnings by 15% annually for the next five years. That's 5% less annually than Whole Foods. For the money, I think that Wild Oats is just too wildly valued.

For those seeking something a bit more staid, value investors may be interested in Kroger (NYSE:KR) and Safeway (NYSE:SWY). They trade at 13.8 and 14.7 times forward earnings, respectively, and are expected to grow earnings 9.6% and 10% annually for the next five years.

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Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Click here to see The Motley Fool's disclosure policy.