Whole Foods Market, Inc. (WFM), The Kroger Co. (KR): Browsing the Shelves for a Grocery Stock

Margins are extremely thin for grocery stores. Price wars and rising food costs are two major factors affecting the bottom line. It is important to look at the return on equity and the return on assets. The Kroger Co. (NYSE:KR) made only $600 million on $90 billion in revenue in 2012. This is a prime example of the difficulties of the grocery store industry. Management effectiveness is a necessary metric. The Kroger Co. (NYSE:KR) leads the pack with its return on equity. Investors are given returns on equity invested in the company at the rate of 36%.

The only company to not have excessive debt is Whole Foods Market, Inc. (NASDAQ:WFM). It has fewer stores to run, but still manages a high net income. With such low margins, it is important to have operating capital and expansion capital. Whole Foods Market, Inc. (NASDAQ:WFM) has been able to accomplish its capital needs without heavy debt.

The pick of the lot

Of these companies, Whole Foods Market, Inc. (NASDAQ:WFM) looks the most promising. It has fewer stores than the other two, but still boasts strong revenue and solid earnings. It is the leader of the organic and natural food mainstream movement right now, and has the best liquidity and the highest economic health. As the company continues to expand stores – and it can stay out of debt – the stock price should appreciate even more. The company supports clean eating and clean investing.

At around $88 per share and a price to earnings ratio of around 33, it is the highest valued stock of the lot. While high priced, it is still the best performing grocery store. The challenge ahead for the company will be competition. Organic and natural foods are catching on – largely thanks to the market awareness of Whole Foods Market, Inc. (NASDAQ:WFM). It is becoming less unique every day as even small, local retailers are carrying organic foods. It is still the best company of this lot, and has proved its business model.

Earnings are expected to remain relatively flat for the next two quarters as the growth slows down. 2013 should see an increase in its overall earnings per share and a price target of $95 is reasonable.

The article Browsing the Shelves for a Grocery Stock originally appeared on Fool.com and is written by Austin Higgins.

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