With the smashing success of the Sprouts Farmers Market IPO, one has to wonder if the Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC) stock is undervalued. Natural Grocers has a faster growth rate and the stock didn’t have the same IPO pop.
The company competes in the quickly growing natural and organic grocery sector against the likes of Sprouts, The Fresh Market Inc (NASDAQ:TFM) and Whole Foods Market, Inc. (NASDAQ:WFM). The sector has become pricey, so is the stock (or any of the stocks) worth buying now?
Basic details
The stock is valued at around $824 million, or roughly 2 times the expected revenue base. As a comparison, Whole Foods Market, Inc. (NASDAQ:WFM) only trades at 1.5 times expected revenue. With 30 times the revenue base it might not be the best example. The Fresh Market Inc (NASDAQ:TFM) has been public for a while and it trades at only 1.7 times revenue. Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC) is definitely a smaller firm with more growth, but at the current price it already trades at a premium valuation compared to the industry leader.
Sector potential
Even with the massive store growth of the smaller firms of Fresh Market, Sprouts, and Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC), the sector still has potential to grab a larger portion of the overall $600 billion U.S. supermarket industry. According to Nutrition Business Journal, spending on the natural and organic sector has been growing at a rate of 10% annually with sales only reaching $43 billion in 2011. With less than 10% of the total supermarket sector, the industry will benefit from the greater access to the produce that the new stores bring.
As an example, in my metro area only Whole Foods provided an option for years, and the closest store was 15 to 20 minutes away. Now Fresh Market, Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC), and Sprouts have stores that are closer, with a few within miles of my home. In that sense, the sector will attract more of my family’s spending basically from location alone. Also worth noting is that my state and city just happen to be at the confluence of the national expansions of these three chains that only average locations in 20 states, leaving the majority of the country untouched by each.
Rich valuation
With Fresh Market and Sprouts only growing revenues at around 15% each, Natural Grocers does offer better growth, though one should be cautioned that Fresh Market presented that same potential until it stumbled during the quarters ending in October and January. That stock cratered to below $37 after reaching $65 on the initial organic momentum. The stock is back over $50, showing the potential volatility that could hit Natural Grocers at any hint of disappointing the market.
With Sprouts more than doubling in the recent IPO, that stock is richly valued now. Unfortunately Natural Grocers had doubled already this year, leaving a questionable valuation as well. With razor thin margins in the sector and revenue growing at stable levels likely below 25%, investors need to be careful paying a very rich 58 times forward earnings. Even Whole Foods, with a $20 billion market valuation, trades at over 30 times forward earnings. If anything, this appears to be attracting more money and investors to the sector.
Bottom line
As a consumer, the biggest annoyance with Natural Grocers is the lack of fresh produce and meat selections. Though my family is likely not the typical natural or organic consumers, Sprouts offers a better shopping experience. If any product selection needs the focus of natural and organic, it would be fruits, vegetables, and meats such as beef and fish. Unfortunately Natural Grocers doesn’t offer those options, while it does offer packed goods from well-known organic producers such as Annie’s. Outside of shopping preferences, the company has produced exceptional results with daily average comps exceeding 10% in Q2 2013. The company doesn’t report Q3 results until August 7.
Though all of these stocks are riding a wave of consumers preferring fresher and more natural foods, the sector is only getting more competitive while the stock valuations are soaring. While the sector will no doubt grow over the next decade, investors will ultimately have a hard time making money paying pricey valuations for stocks facing higher competition.
Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends The Fresh Market and Whole Foods Market (NASDAQ:WFM). The Motley Fool owns shares of Whole Foods Market.
The article Is This Pricey Grocer Worth It? originally appeared on Fool.com and is written by Mark Holder.
Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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