Rule #1 Finance Blog

With Investor Phil Town

WFMI: What’s the Future Look Like?

Lots of questions about whether WFMI is a 4M business, so let's dig in a bit.  Because what we're all about is deciding if the business is going to be predictable for the next ten years or so and then, if we decide it is… is it on sale?


Pretty easy one.  High end, natural food grocery. Best of breed.  Murdering the competition.  Lines all over the stores.  This business definitely represents the future of food.


Brand.  And let's see if its a big wide moat or not by looking at the Big Five Numbers.

First number is ROIC.  Running a steady 9 to 10% over a long time.
Just at the boundary of okay ROIC.  And I'm cutting it some slack for
being in an industry that isn't high profits.  Retail grocers get
ROIC's in the 4%-5% area, so a grocery that gets 9% is really quite

And the most important thing we're looking for with ROIC is
whether it's dropping, because that tells us the CEO is failing to
reinvest the surplus properly.  No problem in that area for WFMI.
Extremely well managed in that regard. 

BVPS, the next most important
number, is really good at WFMI.  It's the best estimate of future growth
and it's running at a consistent 15% to 20% over time. 

Free Cash is
also great. 

Earnings (EPS) at WFMI can be variable more than the other
numbers.  One of the reasons for that is that they don't manage for
earnings growth as the priority.  They focus on cash and return on
investment.  Still, earnings are usually quite good. 

Except last year,
when they did 0%. 

The good news about last year's bad result is that
the CEO told everyone to expect something like that — because they were
making a lot of investments in new stores that would eat into their EPS
for the short term.  So I cut them some slack on EPS growth. 

So the
Big Five, while not perfect, are quite good; and where they aren't, I
know why they aren't.  So I'm good with the Big Five and the Moat.

Still, a few days ago, John Mackey, the CEO, announced that competition
was copying the Whole Foods success and becoming more competitive. 
What that means is that the barbarians are crossing the moat and are
scaling the wall. 

The brand moat that WFMI has been digging for years
is not proving to be wide enough to keep the competitors from attacking
successfully.  At least, that's what I think he's saying.  He said he
doesn't think the company can keep rolling along at the same rate of
growth in the past. 

Simple reason — if other grocers are offering the
same stuff, the war is going to become a price war. 

Price wars reduce
profits, which reduce surplus capital, which means that BVPS, ROIC and
EPS might be heading south a bit.  In fact, John recommended that we
figure on growth of something like 12% to 15% in the future instead of

Bottom line, I think the moat is big enough to call this a
predictable business.  So I want it, but I want it at the right price.
Let's keep that in mind when we figure MOS.


Simply the best.  Honest.  Manages for all the
stakeholders.  Uses ROIC as a key indicator of financial health.  Big
Big BAG (Big Audacious Goal).  Wants to change the world.  Highly motivated believers work
there.  Love the management team.


Here's the new numbers

Future growth rate. Gotta take the
CEO's word for it, but I'm happy with the higher end of his projection
since he tends to underpromise.  I'm using 15% — a lot lower than the
analysts' average. 

And I'm using $1.41 for the trailing twelve months

And a 30 PE since that's a lot lower than the historical PE.

That gives me a Sticker of $43

With an Actual Price of $46, I'm not a
buyer even if I like it. 

Ahhhhhh, welllllll.  Time to go shopping.  Because after a crash like
WFMI just experienced
, it's going to look cheap to some Big Guys — and if
they start to bid it up, other Big Guys are going to sell into the
buying pressure.  That's going to keep the price floating between $40
and $50 for quite a while. 

So when it goes green again, I'm not a buyer.  I seriously doubt that
I'm going to see this priced in the low $30's, which is where I need it
to be to get back in. 

But if it does get down there, I'm a buyer.  So WFMI
goes on my watch list and patience will bring it to me someday
sometime in the future.

Hope that helps you guys see how I think about Rule #1 in real time.

Now go play.