Whole Foods Market, Inc. (WFM), The Fresh Market Inc (TFM): What’s Best of Breed in the Organic Aisle?

Whole Foods Market, Inc. (NASDAQ:WFM)Once the domain of hippies and yuppies, organic food have gone mainstream. As part of the overall theme in healthy living, organic grocery sales have grown 15% in the past year creating a remarkable opportunity for investors.

But what’s the best way to play this trend? A few years ago Whole Foods Market, Inc. (NASDAQ:WFM) was the only public pure-play on organic supermarkets. But recently there’s been a rash of IPOs including Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC)The Fresh Market Inc (NASDAQ:TFM), and Fairway Group Holdings Corp (NASDAQ:FWM). Just like inspecting fruit and veggies in the store, this abundance of selection requires a little extra homework in order to find the top name in the space.

So let’s knock on those watermelons and squeeze some avocados. It’s time to find the freshest stock in the organic aisle.

Fairway Group Holdings

Fairway Group Holdings Corp (NASDAQ:FWM) is the most recent addition to the organic space with the company going public last April. The popular New York retailer boasts the highest sales per square foot in the grocery space. Since being purchased by Sterling Investment Partners in 2007, a private equity group, the company has opened eight new locations with plans to open 300 stores in the northeast.

But there are a lot of problems with the Fairway story. First, the balance sheet is stretched. Sterling has saddled the company with $332 million in debt reducing the company’s financial flexibility  Second, the company’s operations aren’t profitable. Fairway Group Holdings Corp (NASDAQ:FWM) hasn’t turned a profit in three years. Third, expansion is already cannibalizing sales with comparable store sales declining in recent quarters.

This is a highly speculative play and it’s not clear if the company can grow from a beloved neighborhood store into a national chain. Outside of New York, I’m not sure how many people have even heard of the company.

Natural Grocers by Vitamin Cottage

Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC) is a regional chain selling organic products and dietary supplements. The company has 66 locations in 13 states with room to grow that total to 1,100 stores.

Let me be frank. Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC)’ operating results are spectacular. Last year the company grew revenues 27% with same store sales increasing 11.3%. Analysts project the company to post 25% EPS next year.

My only problem with Natural Grocer: valuation. The stock trades at nearly 50 times next year’s earnings giving the stock an alarming 1.80 PEG ratio. That doesn’t leave much room for multiple expansion and any hiccup could send the stock into free fall.

The Fresh Market

The Fresh Market Inc (NASDAQ:TFM) is another great regional to national growth story with 130 stores throughout the Southeast, Midwest, and Mid-Atlantic. Management thinks there’s room to triple its store count to 500 locations.

At first glance, The Fresh Market Inc (NASDAQ:TFM) looks like the cheapest name in the space. The stock trades at only 25 times forward earnings and sports a 1.2 PEG ratio. Case closed! The Fresh Market Inc (NASDAQ:TFM) is clearly best of breed.

But the company has had problems recently. The Fresh Market Inc (NASDAQ:TFM) has missed estimates in its last two quarters and several executives have left the company to pursue other opportunities  This calls into question whether the company has the managerial talent needed to execute its growth plan. In addition, the company lowered in 2013 EPS guidance to $1.55. Significantly lower than the $1.69 the street had been looking for.

Given these problems, the discount may be deserved.

Whole Foods Market

Which brings us back to ol’ Whole Foods Market, Inc. (NASDAQ:WFM). The company has a clean balance sheet with only $24 million in long-term debt while generating ample cash flow from operations to fund expansion. Whole Foods Market, Inc. (NASDAQ:WFM) has roughly 350 locations with room to open 1,000 stores in the United States in addition to international possibilities. Given the company’s strong national brand, it shouldn’t have any problems becoming established in new markets. Plus the company’s size gives Whole Foods Market, Inc. (NASDAQ:WFM) the best margins in the industry.

No doubt, based on the fundamentals Whole Foods Market, Inc. (NASDAQ:WFM) is top name in the space.

Investors may quibble on Whole Foods Market, Inc. (NASDAQ:WFM)’ valuation. At 25 times forward earnings, the stock sports a premium 1.3 PEG ratio. But when picking stocks, it’s always desirable to pay up for best of breed. It’s the peace of mind.

The article What’s Best of Breed in the Organic Aisle? originally appeared on Fool.com and is written by Robert Baillieul.

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