Whole Foods Reacts Poorly To Results

I feel for shareholders of Whole Foods Markets (WFMI). Yesterday the company reported 20% growth for yet another quarter and boosted its 2010 revenue goal to $12 billion from $10 billion. In a bid to please shareholders, the company also announced a $4 special dividend, a regular dividend increase of 30%, a two-for-one stock split, and a $200 million stock buyback plan.

Getting all four of those surely sounds like a good thing, but WFMI shares are down $9 in pre-market trading. The reason is quite simple. Whole Foods is a very high multiple stock and Q3 earnings didn’t come in ahead of estimates, which many were banking on. Despite a growth forecast of 20% annual growth through 2010, the stock is under pressure.

This is undoubtedly due to the stock’s high P/E. The company should earn about $3 next year, but that equates to a price-to-earnings ratio of 48 before today’s drop. You’ll be hard-pressed to find many investors who are willing to pay more than that for a stock, even if WFMI’s outlook is very bright and the company can deliver on its growth goals.

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15 Thoughts on “Whole Foods Reacts Poorly To Results

  1. NO DooDahs on November 10, 2005 at 9:35 AM said:

    Exactly what will happen with GOOG when it fails to exceed expectations.

  2. Chad Brand on November 10, 2005 at 9:41 AM said:

    Are you short GOOG? The way you continually knock people who are long the stock, it would be a little lame if you weren’t. It would come across as you are simply bitter that you’ve missed the run from $100 to nearly $400 per share.

    I would just point out that eBay, Yahoo, and Amazon have all reached the point where they no longer consistently beat expectations, and yet those stocks still garner 40 P/E’s because they are still growing very quickly.

    The same will happen with WFMI, as well as GOOG, in my opinion.

  3. Jack Miller on November 10, 2005 at 10:19 AM said:

    Wow! I love these comments. The market is alive and well. I happen to be long GOOG. Including my extended family, we have purchase the stock 14 times on the way up, starting on the offering day.

    Google has built an advertising machine that is far better than the Yahoo machine which is far better than any other. The Google system is incredible. In a nano second, the firm finds the most relavent web sites and it serves up advetising that is relavent to each particular person who searches.

    On the other hand, I struggle to build confidence in Whole Foods. What is it that gives this company any kind of “moat”? Could Kroger’s et. al. not take a bite out of Whole Foods by changing their product mix?

  4. Chad Brand on November 10, 2005 at 10:27 AM said:

    This is true, Jack. In fact, Safeway has already begun such a transformation. I do think WFMI will hit their 20% annual growth goal, after all, they are a lot smaller than the big established grocery chains. However, I think Safeway is right to think that if they change their offerings, they too can survive. Those that don’t, well, they won’t.

  5. NO DooDahs on November 10, 2005 at 10:29 AM said:

    Chad, I don’t think I’ve EVER knocked anyone that was long GOOG, here or on any other board. I do think it’s overvalued, and I have been surprised that it’s made it this far.

    GOOG isn’t a good short IMO, even though it’s obscenely overvalued. Let me explain why …

    Good shorts are the “evil twins” of good value stocks. Good shorts should have several, or all, of the following.
    1. Unreasonable valuation
    2. Poor earnings quality if earnings existed
    3. Poor cash flow metrics
    4. A dirty proxy statement
    5. Insider selling that was beyond the norm and not otherwise explainable
    6. Low short interest.

    I think those are self-explanatory. GOOG has only three of those, unreasonable valuation, rampant insider selling, and a low short interest. Furthermore, GOOG is a good COMPANY. One should NEVER short a good company. My position is that GOOG is not a good investment. I like buying good companies at good prices, not paying a premium for the best.

    Obviously you disagree, and you have made a bunch on GOOG. That’s OK, we’ve disagreed on some other stocks you’ve written about, and I’ve probably made money on some trades that you missed.

    I’ve been right and wrong, wrong on GOOG so far, but as long as I continue to be right often enough to beat the indices and inflation, I’m OK with missing GOOG.

  6. Chad Brand on November 10, 2005 at 10:42 AM said:

    Interesting points.

    I would think if something is obscenely overvalued, it would be a good short.

    Finding all 6 of those characteristics for a short is pretty tough.

    I would disagree that one should never short a good company. In the 1990’s you had Pfizer, Coca Cola, and GE all trading at 50x-60x earnings. They were all great companies, and great shorts because you could not justify those multiples.

    You of course can argue that GOOG falls into that category too, being 45x forward EPS, but they have yet to venture into many markets, and they plan to do so. There’s no guarantee they’ll be successful, but if they are, they could double ot triple their current size. You couldn’t say that with Coke, for example.

    As you mentioned though, you just have to be right more than you’re wrong. It’s much like getting a hit 3/10 times up to bat makes you at all-star. With the market it takes more than that, but still we can all afford to be wrong sometimes, fortunately.

  7. NO DooDahs on November 10, 2005 at 11:35 AM said:

    Well, I’ll make a revision. I won’t short a good company. I also won’t buy a good company unless the valuation is below what I think is fair.

    That leaves me with maybe 20%-25% of the complete universe of stocks to play in, excluding the middle bunch. Considering that I’m just investing my money and that corresponds to well over 1,000 companies, I’ve got no problem finding more opportunities than I have capital for.

  8. Jack Miller on November 10, 2005 at 1:49 PM said:

    My aggressive account went out the roof today because it is loaded with CAL, AMR and LCC. Of course, GOOG and several others also did well.

    Tonight, I plan to study the market internals and I may want to put on a short as a hedge. I may short the QQQQ’s. I would love to get a good short stock idea. I believe there is going to be a big up market coming but based on the internals as of last night, the bears are all turing bullish too fast for this to be the big move. I suspect a pull back if the call options were bought as heavily today as it appears.

    If you have any ideas, please let me know. I want to hold my airline positions and I do not want to short against the box as I see further up potential.

  9. Jack Miller on November 10, 2005 at 3:31 PM said:

    Chad, what do you think about SIRI as a short? The holiday season is here, do you suppose there could be some serious disappointment in sales of SIRI products while APPL continues to do well?

  10. Chad Brand on November 10, 2005 at 3:46 PM said:

    Jack,

    SIRI is a stock that I do think looks overvalued. However, I think it’s a dangerous short. The stock could very well run into Christmas, like it usually does. Stern starts in January, which should be priced in already, but SIRI is owned mostly by retail investors, and they want to own it, regardless of valuation.

    While Karmazin will have to do an amazing job to justify the current stock price, people realize it will take time, and they are willing to give him a few years to turn in solid results. If the stock does fall meaningfully, it could take a while.

    While shorting it alone is risky, in my opinion, I do think a paired trade of short SIRI/long XMSR makes sense if you want to play the bearish SIRI call.

    XMSR gets 2 out of every 3 new satellite radio subs. They have a lower cost structure, are not spending $100M a year on Stern, and will turn a profit sooner. Their technology is further along. The only thing SIRI has on them is Karmazin.

    That all said, SIRI is valued higher in terms of enterprise value. If XMSR maintains its lead (Stern cannot single-handedly close the huge gap with XMSR), there is no reason SIRI should be worth more.

    That’s my take.

  11. NO DooDahs on November 10, 2005 at 2:47 PM said:

    I haven’t looked at SIRI proxy, but they fit the criteria otherwise. No earnings, bleeding cash like a stuck hog, book value decreasing, unreasonable PS and PB, constantly diluting value with share issuance and debt issuance, massive insider selling, all this and a short ratio of “only” 2.7.

    SNE based on the “pop” from their CD’s placing spyware on users’ PCs. I haven’t checked them out, but this may make a good trade. Check these links out, arranged by age, the USAToday is the most recent.

    http://www.theinquirer.net/?article=27426
    http://www.channelregister.co.uk/2005/11/03/secfocus_drm/
    http://www.theinquirer.net/?article=27416
    http://www.cdfreaks.com/news/12624
    http://informationweek.com/story/showArticle.jhtml?articleID=173402819

    http://www.usatoday.com/money/industries/technology/2005-11-09-sony-usat_x.htm

    Stocks with high bankruptcy risk like GM, F, CPN, FNM. I’ve been all over GM and CPN for months, and haven’t seen anything good come out of any financials since then. Of course, there has been occasional up action in their prices …

    AIG stock price has almost recovered from their last restatement announcement, only to announce another.

  12. Jack Miller on November 11, 2005 at 8:55 AM said:

    My thanks to each of you. I agree that SIRI is dramatically over-priced. The price to sales is better than 60 times and the company is bleeding cash all over the place. I also see the risk of a bounce around the new subscriptions to come as a result of Stern.

    For now, I have decide to patiently watch. Besides, the sentiment numbers did not jump as much on yesterdays moves as I thought they might. After seeing the numbers, a couple of my “friends and family” accounts bought more AMR, CAL and WMT.

    Again, I appreciate your sharing your thoughts with me.

  13. David Hopkins on November 16, 2005 at 2:38 PM said:

    Stern’s listerners are extremely loyal (for some unknown reason). All the Stern fans that I know will be paying to switch to SIRI. I bought in the mid sixes and will hold for a few more months.

  14. NO DooDahs on November 17, 2005 at 7:19 AM said:

    Scott Greenstein had 425,000 units vest on Apr 15 2005 and sold 211,381 on the same day. James Meyer had 400,000 units vest on Apr 15 2005 and sold 179,635 on the same day. Apr 14 2005 was a Thursday. On Apr 15 2005 (Friday), the stock opened down $0.05 and closed down $0.15. The following Monday (Apr 18 2005), on much heavier volume, the stock closed down another $0.07. The pattern is that key personnel share vesting dates for large quantities of stock (lots of dilution), and they sell at least 1/2 of it as soon as it vests. Joe Clayton has 750,000 shares that vest on 12/31/2005. Likewise he has 250,000 restricted shares that vest on 1/1/2006, not counting shares that were accelerated to vest on 1/1/2006 per the May 2005 proxy statement. Given that Joe has sold 6 million shares in the past year, it’s a good bet he will sell soon after he’s vested. Granted, that is right around the Stern pop, so who knows?

    Karmazin has 6 million in options at $4.72 per that vest every year for the next five, starting at Nov 18 2005. You remember that ONE insider buy in the last year? It was Karmazin, right after being named CEO. Hmm. I wonder if he will sell a portion of his options as soon as they vest for tax purposes … 2-3 million hitting the market would make a dent, even with SIRI volume.

    http://www.thestreet.com/_yahoo/options/marinooptions/10253241_2.html
    ”Sirius saw the January 7.50 calls trade 5,600 times. The stock was up 23 cents, or 3.2%, to $7.40.” Going contrary to sentiment appeals to me, when sentiment is strongest is usually right before a turn.

    I did find a true pattern, though. In 10 of 11 years, the Dec open for SIRI was below the Nov high. November high so far in 2005? Yesterday.

    Still giving serious consideration to opening a modest short position either tomorrow or on Friday morning, based on a belief that Karmazin will sell 2-3 million shares starting Friday and carrying on into next week. Nothing “inside” about this, just based on reading the proxy statement and watching the pattern of insider selling. Also, the stock has rarely been this high since Karmazin signed on. Lastly, MACD and RSI provide some support to an overbought condition.

  15. NO DooDahs on November 21, 2005 at 9:35 AM said:

    I opened and (profitably) closed a reasonably large (for me) short position Friday and opened a more modest position again today.

    XMSR came up as a short candidate in my search, IMO it is just about as sad as SIRI, but the short ratio is already too high for my tastes. It is possible that NEITHER company “wins” and both lose – just because the technology is good doesn’t mean it’s profitable in their current business plans. I have no doubt the technology will survive, but I have doubts that the companies will, at least, not before serious dents in their valuations occur.

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