The circumstances that more than doubled Whole Foods Markets’ (WFM) share price in a two-year period appear to have changed for good, and that’s led to some mixed opinions about whether the company can continue to deliver outstanding shareholder returns. There are a few signs that Wall Street may be refocusing its love for Whole Foods onto Fresh Market (TFM), the younger underdog in the organic grocery business.
Shares of both companies have suffered since reporting fourth quarter earnings in February, as seen in a stock chart. It was the second deep plunge for Fresh Market, which also dropped in November on an earlier earnings report that disappointed mightily.
Fresh Market has an eighth of Whole Foods’ $16.2 billion market cap and only a couple of years of trading under its belt. But the company attracted several votes of confidence from Wall Street following that ugly February earnings report. Raymond James and UBS initiated coverage of Fresh Market shares in March with a buy rating from Raymond James and a strong buy from UBS. Goldman Sachs upped its rating to a buy. BB&T Capital started coverage with a hold.
Whole Foods, on the other hand, got a downgrade from Piper Jaffray to neutral from outperform. Raymond James initiated coverage the same month with a market perform rated. Edward Jones upgraded to a buy.
At first glance, these hardly seem like logical reactions. Fresh Market missed forecasts completely with its latest report, which included a piddly 1.9% gain on comparable store sales. Whole Foods made most of its numbers, although actual and forecasted same store sales gains (7.2% for the quarter and 6% to 6.8% for the year) disappointed a bit.
But this is all about potential and valuation in a business that taps a wealthier class of consumers less likely to suffer in a prolonged economic recovery. Profit margins are wide here, and demand for the product is strong. Whole Foods grew to prominence when high-priced organic food was a niche market pursued by few. Now even Wal-Mart stores (WMT) have organic food aisles, and Whole Foods’ customers are more focused on price. Whole Foods warned that its profit growth would slow this year. Forecasts call for Fresh Market revenue growth of about 16% this year and 18% the following year to outpace Whole Foods. And for once, Fresh Market shares are cheaper, based on both a trailing PE ratio and a forward one.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org.
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