By Leigh Drogen,
Whole Foods (WFM) is about to become the next Starbucks (SBUX). I’ve seen the ascension of Starbucks from a simple coffee shop to a focal point in so many people’s lives, even those like me who don’t even drink coffee.
I spend a lot of time down in Union Square (NYC). It has become the center of gravity for just about everything I do, from work, to the gym, restaurants, and simply getting around the city. For those of you who don’t know your NYC history, Union Square was one of the worst neighborhoods back in the 70′s, the park was full of druggies, and everything surrounding the park was porn shop or porn theater.
Today, at the center of Union Square sits a Whole Foods, flanked by no less than three Starbucks shops around the park. Union Square has become the center of the real NYC, unlike Times Square which everyone judiciously attempts to avoid on a daily basis.
I’ve watched as Whole Foods has become the rally point, pit stop, and melting pot of Union Square, and for myself. And I can tell you this, Whole Foods is about to break through and become the next Starbucks. It is about to move from being an organic grocery store, to a cultural icon.
Let’s take a look at a few charts.
Whole Foods trades at a P/E right around 36, which compared to the multiples it was fetching at the same price back in 2005 is relatively cheap. In other words, WFM is trading at half the P/E multiple it was in 2005, even while it is growing earnings at a faster pace than it was during the 2005 run.
When we look at the sales multiple we see the same story, the stock is trading at half the 2005 multiple while the company is growing sales at 2/3 the pace while sales have doubled.
Is Whole Foods a “cheap stock”? No, it’s a growth stock which deserves a rich multiple, and I believe that multiple is about to get even richer as the market realizes the company is far more than just a high growth grocery store.
The play on Whole Foods’ business centers around prepared food. At least 2 nights a week I make a stop at Whole Foods to grab dinner. When I walk in there at 7PM it’s a mad house. The place is packed with students, professionals, and tourists alike. I grab something from the buffet, or the hot meats section and head upstairs with my laptop to continue working through dinner. I see so many people doing the same.
While Starbucks is the place where people go to hang out and drink coffee casually with their friends, or sit and do work throughout the day, I’m seeing Whole Foods transform into the rally point for people looking to grab food with friends or colleagues before continuing on with their evening. It has become far more than just a buffet, people just hang out there now. And that’s a powerful thing for the Whole Foods business because it creates a bond between what they are selling and an experience.
And while the experience of fighting a million people to get my dinner could be better, I love the food, it’s healthy and hearty, and I love sitting upstairs amongst all of those people in that communal eating setting. I love holding meetings there with colleagues over a quick dinner.
Whole Foods has the opportunity to become not only America’s organic grocery store, but the center of ever major city and town. The Starbucks DNA is coffee, and to some extent other items that fit within a coffee house. But Whole Foods possesses the DNA for so much more. And unlike anyone else, they’ve been able to offer a really amazing prepared food product at not so exorbitant prices. Would you rather go to Whole Foods or Penera Bread? Hands down Whole Foods.
The stock is about to eclipse its all time high set back in 2005, wiping out the last of losses from the 2008 financial meltdown when ever growth stock was taken to the cleaners.
The volume profile on the weekly chart looks very positive as the stock is chewing away at the all time high resistance level. I believe we’re going to see a major beat from WFM during this round of earnings resulting in a high volume breakout for the stock, which should also begin the process of multiple expansion as domestic spending fears take a back seat to the secular growth story taking place at Whole Foods.
At a conservative 15% revenue growth rate for the next four quarters here are my earnings and revenue estimates compared to the Wall Street estimate. You can head over to Estimize and share your own.
If the company executes on the opportunity they have in front of them, I believe I’m going to have to revise the estimates upwards and multiple expansion may be even greater than I expect.
Look for WFM to trade north of $90 by the time it reports FQ4 2012 earnings.
Disclosure: Nothing in this article should be considered to be advice, research or an invitation to buy or sell any securities, please see the Disclaimer page on my website for a full disclaimer.
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