Whole Foods a Buying Opportunity

Despite Whole Foods Market's (WFMI - Snapshot Report) ugly third-quarter results and equally bad guidance, we maintain our Buy rating on the stock. We are looking past the company's short-term problems and focusing on Whole Foods' long-term growth potential.

In our view, the company's fiscal third-quarter report could mark a capitulation bottom in its stock price. The management owned up to all of its problems, indicated that those problems will persist into 2009, and presented its strategy to deal with those problems.

The company is focusing on controlling costs, scaling back new store openings, working to integrate Wild Oats stores into the mix, improving free cash flow, and operating in a weak consumer environment. This focus on operational improvements will be long-term positive for Whole Foods and should enable the company to re-accelerate earnings growth in 2009 and 2010.

WFMI shares are trading at 24.1x our fiscal year 2008 EPS estimate and 19.1x our fiscal year 2009 EPS. Whole Foods' P/E multiple is still well above the industry mean and median, but that is reasonable because of the company higher expected growth rate. Our six-month target price is $26, or about 15x our fiscal year 2010 EPS estimate.

Read the full analyst report on WFMI