Natural Grocers by Vitamin Cottage Inc (NGVC): Is This Stock the Next Whole Foods Market, Inc. (WFM)?

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Investors are like fishermen; they all have a story about the big one that got away.

For many it’s the same tale with Whole Foods Market, Inc. (NASDAQ:WFM). Since the company went public in 1992, the stock has returned over 3,000%. This has left many investors playing fruitless games of ‘woulda coulda shoulda’ and searching for the next big winner.

And it’s in this hunt that has brought my attention to Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC). Here are three reasons why this company could be the next Whole Foods Market, Inc. (NASDAQ:WFM).

Visible multi-year growth story

Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC) started as a husband and wife team in 1955 when the Isely’s sold whole wheat bread door-to-door in Golden, Colorado. Nearly 60 years later, the company operates 66 retail outlets across the western United States selling organic groceries and dietary supplements.

Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC) is ramping up an aggressive growth campaign with plans to open 13 new stores by the end of the year. Management sees room for 1,100 locations nationwide giving the company a long growth runway.

And it appears the concept is taking off.

Last year, same store sales grew 11.3%. That’s the highest in the organic retail space.

Going forward, management is targeting high single-digit same store sales growth as the demand for natural food increases.

Such rosy projections are great, but does the company have the financial resources to execute?

Definitely! Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC)’ financials are in great shape. The company has a clean balance sheet with only $16 million in long-term debt. In 2012, operations produced $25 million in cash generating ample funding for expansion.

Margin expansion

Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC) has loads of margin expansion potential.

First, the company has invested heavily in improving its supply chain. Technology allows management to better deliver the right product at the right time reducing spoilage.

Second, Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC) costs are mostly fixed. As the company grows, margins will benefit from economies of scale and purchasing power over suppliers.

Could Natural Grocers’ profits be wiped out as its encroaches on Whole Food’s (NASDAQ:WFM) territory?

That’s a valid concern, but there are a few reasons why the two companies aren’t necessarily head-to-head rivals.

For starters, both chains cater to a slightly different demographic. Natural Grocers has positioned itself as a lower cost, less frills retailer.

In contrast, Whole Foods Market, Inc. (NASDAQ:WFM) operates larger, fancier stores which highlight departments and prepared foods. It’s catering to a higher income clientele.

Additionally Natural Grocers tends to open in smaller markets that doesn’t fit the Whole Foods Market, Inc. (NASDAQ:WFM) business model.

Reasonable valuation

Natural Grocers has a 70 trailing P/E ratio.

But before you dismiss the stock because of its steep price tag, let’s dig a little deeper.

Natural Grocers is trading at 45 times forward earnings. Given that profits are expected to grow 36% this year the stock is trading at a fair 1.25 PEG ratio. That’s not cheap but reasonable for a great growth story.

How does this compare to other names in the space? The stock is valued roughly in-line with its peers.

The Fresh Market Inc (NASDAQ:TFM) trades at a cheaper 25 times forward earnings.

But you get what you pay for.

In the past year several executives have resigned calling into question whether The Fresh Market Inc (NASDAQ:TFM) has the head talent needed to carry out its growth strategy. In addition, last month management lowered their 2013 EPS guidance to $1.55. That’s much lower than what the Street was expecting.

How about against the titan in organic retail: Whole Foods Market, Inc. (NASDAQ:WFM)?

The stock trades at 25 times forward earnings with a prime 1.30 PEG ratio. It’s hard to argue that the company is anything less than the best in class due to its scale, excellent management, and brand recognition. For that reason alone, Whole Foods is worth the premium.

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