My colleague, Tim "The Bull" Beyers, has made some very good points -- but I'll get the last word.
This may sound like a criticism, but it's more of a reminder. Relative valuation has its place, but we have to remember that metrics like EV/EBITDA, while useful, are valuation shortcuts with built-in biases. It's certainly OK to use relative valuation; we just have to be careful about it.
That said, I think it's important to account for maintenance capital expenditures when using that metric to compare Whole Foods
Whole Foods is the only company opening stores at a decent pace. Kudos to its management, then, for disclosing to investors the amount of capital it uses specifically to open new stores, as well as the total. Assuming the rest is for maintenance, adjusting EBITDA by that $131 million figure provides a ratio of 17.2. Last year, adjusted EBITDA grew about 35%, but management has already warned that operating expenses will rise as it accelerates store openings. Let's not forget that maintenance capital requirements will also increase as the store base grows. Clearly, the market sees that growth rate falling.
Again, I don't think Whole Foods is cheap, nor does it come with a substantial margin of safety relative to its future prospects. If it's going to justify its current multiple by maintaining margins and growing sales, it's got its work cut out for it.
I'm sticking by my original conclusion: Great company, lousy stock price.
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Fool retail editor David Meier loves the hot bar at Whole Foods. He does not own shares in any of the companies mentioned. He is ranked 703 out of 25,169 investors in The Motley Fool's CAPS rating service. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.