What: Shares of Whole Foods Market (NASDAQ: WFM), a national grocer specializing in local, natural and organic foods, surged by $2.79 on Thursday to close at $56.30 after briefly touching a fresh 52-week high of $56.77. The reaction was primarily related to the release of its first-quarter earnings results, however Whole Foods also caught three separate price target increases.
So what: According to data aggregator Briefing.com, the following three research firms substantially increased their price target, or the level at which these firms consider the company to be fairly valued, on Whole Foods. They are:
- Telsey Advisory Capital from $48 to $52
- Imperial Capital from $50 to $65
- Barclays from $40 to $51
All three firms kept their ratings unchanged, with Telsey Advisory and Barclays maintaining the equivalent of a "hold" rating and Imperial Capital suggesting a "buy" based on its "outperform" rating. Over the past 52 weeks, Whole Foods stock has ranged from $56.77 to $36.08, according to S&P Capital IQ data.
The impetus for the price target hikes was Whole Foods' first-quarter results, which were released after the closing bell on Wednesday. For the quarter, Whole Foods announced a 10% increase in sales to $4.7 billion, comparable-store sales growth of 4.5%, and $0.46 in EPS, a 10% increase from Q1 2014. Most importantly, it ended a long streak of same-store sales growth deceleration in established stores.
Now what: The question that investors need to ask themselves here is whether these price target increases make sense. In other words, does one earnings report vastly change Whole Foods' outlook that drastically?
On one hand, the company operates in a niche natural and organic food space that's clearly growing. Consumers are willing to pay more for food that's perceived to be more nutritious, which is a great thing for Whole Foods' margins and long-term outlook.
But, in retrospect Whole Foods' struggles last year are also a reminder that this space is getting crowded by new competitors. It's going to be difficult for Whole Foods to expand into new cities and keep its margins stable if it's having to fend off rapidly growing rivals.
This push-pull dynamic of the business makes its forward P/E of 29 look downright terrifying. Yes, Whole Foods can grow its top line by 10% per year, but its organic growth of 4%-5% could leave a lot to be desired at its current valuation. You'll also note that both Telsey Advisory's and Barclays' price targets are below where Whole Foods closed on Thursday, signaling that they, too, are skeptical of its valuation here.
While I wouldn't argue against owning Whole Foods over the next 20 years, I'm personally not a big fan of the stock over the intermediate term (one-to-five years).
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. The Motley Fool owns shares of, and recommends Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.