Wednesday, August 5, 2009

Truth Squad on Whole Foods

First of all, I have no position in Whole Foods. Two years ago I owned it and sold in a very short time period making a little money. Anyway, I glance at it every now and then and knew some people shorting it and so after seeing the stock report earnings and the stock rally 20% I decided to take a look. Good grief!!! How in the world this stock is up 20% I have no idea but the spin job in news reports is in full force. Hadn't looked at anything: below is the first story I looked at.

From yahoo finance (actual article is from Reuters)

From the first paragraph:

Whole Foods Market Inc on Tuesday posted third-quarter earnings that beat Wall Street's expectations, as sales rose, and the seller of organic and gourmet food items raised its full-year earnings forecast.

Wow - sounds pretty good right. Beat on earnings, raised forecast, and sales rose!!

Third paragraph. Are you kidding me???

Though it raised its profit outlook, the company chose to remain guarded about its sales expectations for the fourth quarter -- possibly to avoid disappointing investors, according to one analyst.

Wait, so it raised forecast but apparently it wasn't impressive enough unless you assume that the company is being conservative??? So the company forecasts and we are automatically to interrupt that they are low balling because otherwise it would be a negative. Unreal.

From the 6th and 8th paragraph:

Austin, Texas-based Whole Foods said net income rose to $42.8 million, or 25 cents per share, for the fiscal third-quarter ended July 5, from $33.9 million, or 24 cents per share, a year earlier.

Analysts, on average, expected 20 cents a share, according to Reuters Estimates.

Okay so they beat by a nickel or by 25% but earnings yoy increased by 4%. That would be something to get excited about right? I mean the company is trading at a 10 PE. That should be worth at least a 12 PE if you assume 2 to 3% inflation. Oh wait?? They aren't trading at a 10 PE?? NO WAY!!! A 46X trailing PE and 32X forward PE???? (that is consensus analysts forward PE, using company guidance it is a 38X forward PE) More than 15X FCF? Gulp!!

But sales are doing great. The first paragraph talking about the increase. They can grow into this valuation especially if they are focusing on costs.

From paragraph number 10 and 14

Same-store sales, which tracks sales at stores open at least one year, fell 2.5 percent. Identical store sales, excluding nine relocations and two expansions, fell 3.8 percent.

For the first four weeks of the fourth quarter ended August 2, same-store sales fell 1.1 percent and identical store sales declined 2.7 percent, Whole Foods said.

This is just unreal. Because of new store openings sales technically did rise, don't fall over, I know it is shocking, from 1.84 to 1.88 billion or 2.2%. Since when has Wall Street ever cared about that? Same store sales mean (or used to mean) 100 times more. So we are paying 38X forward earnings for a company whose earnings went up 5% and their sales went up 2.2% because of newly opened store? Same store sales are falling between 1.1% and 2.5%.

I guess I shouldn't be shocked yet the pressure is to buy buy buy so you don't get left behind and underperform the stock market.

If your a trader, the trade is simple. Big resistance at 30 if you pull up a 2 year chart. You short it below 30 and have a stop at say 30.25 (day high was $30.13). Very very easy trade. I don't usually trade and haven't decided whether I will do that or not. If your an investor looking at this as a great short it becomes much harder unless you willing to ride the roller coaster. When an earnings release like this can send the stock up 20% in the face of all logic, tread carefully. That is the entire market right now.

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