Sometimes you find investment inspiration in odd places.
On May 25, I woke up to 2,000 angry protesters marching through the streets of Montreal.
One sign read, “Monsanto! Semeurs de Mort!”
Translation: “Monsanto! Sowers of Death!”
Another sign read, “Monsanto, terroriste!”
No translation needed.
This event was part of a global protest where over 2 million people across 52 countries rallied against the use of
genetically modified crops.
But I didn’t see protesters. I saw 2 million customers who care deeply about where their food comes from, the impact agriculture is having on the environment, and what they’re putting into their bodies.
And that spells a big opportunity for one big retailer.
The opportunity
Once the domain of hippies, organic food has now gone mainstream.
Consumers are increasingly engaged when they shop. They’re making decisions based on their values and awareness of environmental and health concerns.
That trend has created a growing demand for organic and natural food. Today, U.S. organic grocery sales exceed $30 billion annually and that figure is projected to double over the next decade.
Who’s poised to profit?
No longer is price the only factor when grocery shopping. Customers want to be ensured their food is organic, natural, and sustainable. They need a trusted grocer to ensure their food meets a higher standard.
Which is why consumers are turning to Whole Foods Market, Inc. (NASDAQ:WFM).
Whole Foods is a leader in supporting local and sustainable agriculture. Through its Whole Trade program, it looks to improve compensation and quality standards for its developing-world suppliers while reducing its own environmental impact.
For this service consumers are willing to pay a hefty premium which translates to the bottom line. Whole Foods Market, Inc. (NASDAQ:WFM)’ net margin is two to three times those of traditional supermarkets like The Kroger Co. (NYSE:KR) and Safeway Inc. (NYSE:SWY).
Enormous growth potential
Most investors still underestimate Whole Foods Market, Inc. (NASDAQ:WFM)’s growth potential.
Management is aiming to open 1,000 locations in the United States, triple its current store count. But recent developments suggest this target may be too low.
In the company’s most recent conference call, management hinted that they were seeing little cannibalization in what were once thought to be saturated markets like Boston.
Whole Foods Market, Inc. (NASDAQ:WFM) has also been successful opening smaller stores under 40,000 square feet. This model is helping the company penetrate mid-size markets where its traditional super-centers didn’t work.
In addition, Whole Foods Market, Inc. (NASDAQ:WFM) has only just started its international growth campaign with less than 15 stores in Canada and the U.K.
As the marketplace realizes the true scale of this opportunity, it could be a catalyst for a higher share price.
Financials
Whole Food’s financials are remarkably strong. The business is highly scaleable allowing profits to grow much faster than revenues.
Even more impressive, the company earns six cents in free cash flow for every dollar generated in revenue. That’s the best in the grocery business and means the company has ample funds for shareholder friendly activities like dividends and buybacks.
Plus, there’s almost no long term debt on the balance sheet, which gives Whole Foods the financial flexibility needed to execute its growth strategy.
Best of breed
Stingy investors may prefer a traditional retailer like Safeway Inc. (NYSE:SWY) which trades at eight times earnings and sports a 3.5% yield.
Why is that a mistake? Growth.
Total grocery spending in North America is stagnant. Where are organic sales coming from? Straight out of the pockets of traditional supermarkets.
In the past five years Safeway Inc. (NYSE:SWY) have grown revenues at an anemic 2.5% annual pace. Combined with relentless price competition from big-box retailers like Costco Wholesale Corporation (NASDAQ:COST) and Wal-Mart Stores, Inc. (NYSE:WMT), Safeway has little ability to grow earnings.
How about against organic rival The Fresh Market Inc (NASDAQ:TFM) ?
At first glance The Fresh Market Inc (NASDAQ:TFM) looks like a better bet. The stock trades at a cheaper 35 times earnings with the company planing to triple its store count to 500 locations across the Southeast.
But the problem here could be in the execution. In the past year, several key executives have resigned which calls into question management’s ability to execute on its expansion strategy.
In addition, the company cut its 2013 EPS guidance to $1.55. That’s much lower than the $1.69 the street was looking for.
With Whole Foods Market, Inc. (NASDAQ:WFM), I don’t have to worry about these problems.
The company has a nationally recognized brand that can expand into any market it chooses. Whole Foods Market, Inc. (NASDAQ:WFM)’s size and scale also allows it to withstand competition better than smaller players.
For these reasons it’s worth paying a premium for best of breed.
Foolish bottom line
Whole Foods is a company that combines turbo charged growth with strong pricing power. And it’s just getting warmed up.
The article 5 Reasons to Buy This Retailer originally appeared on Fool.com and is written by Robert Baillieul.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market and Whole Foods Market (NASDAQ:WFM). The Motley Fool owns shares of Whole Foods Market. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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