If Whole Foods Had a Little Brother ...

KEVIN KENNEDY
PUBLISHER
COOLCATREPORT.COM

COMPANY: Wild Oats Markets
TICKER: OATS (Nasdaq)
PRICE: $17.26 (as of 4 p.m. yesterday)
52-WEEK RANGE: $9.97-$20.60
MARKET CAPITALIZATION: $490.93 million

Kevin Kennedy is the publisher of the Coolcat Explosive Small Cap Growth Stock Report. Wild Oats Markets operates natural food supermarkets throughout North America. Mr. Kennedy spoke to David Dalley of The New York Sun about why he believes the company's stock could increase in value by more than 38% over the next 12 months.

What does the company do?

They're a chain of natural and organic food markets. They operate in 24 states and British Columbia, and they have 113 stores. They're part of the healthy, environmentally conscious, organic, natural, clean-living trend, and they compete mainly with Whole Foods and Trader Joe's. They're like the little brother of Whole Foods. They target a highly educated, affluent market.

Why do you like the stock?

There are a lot of reasons. Naturally, I like stocks that are performing well, and this one has recently reached new highs. But if you look under the hood, it's a turnaround story. This is a company that almost went bankrupt in the late '90s. They expanded too quickly and opened too many new stores. They lost $1.37 per share in 2004, and then turned around to earn 11 cents in 2005. I expect them to earn 34 to 40 cents in 2006, and more than 50 cents in 2007.

They're still growing - they opened eight stores last year - but it seems like they're better focused now on getting their core game plan right, keeping their costs down, and growing in a more controlled way. They recently opened a store in Tampa, and it was the biggest opening in their history in terms of sales.

How does the company compare to its rival, Whole Foods?

Basically, Whole Foods has executed its strategy better, is a bigger company, and is more of a Wall Street darling than Wild Oats Markets. Whole Foods has about 4.5 times the sales of Wild Oats. Wild Oats had revenues of $1.12 billion over the last 12 months, but their market cap is only $491 million, so their price-to-sales ratio is just 0.43.

Contrast that to Whole Foods. They've got sales of $5 billion and a market cap of more than $8.5 billion - that's a ratio of 1.75. So Whole Foods has 4.5 times the sales, but almost 18 times the valuation of Wild Oats. If you gave Wild Oats the kind of multiple Whole Foods has, and I'm not saying it necessarily deserves it at this point, it would be a $65 or $70 stock.

What must they do to increase that multiple?

They're on the right track. They need to continue to execute well, and they need to start growing a little faster. Sales were up 7% last year, which was a strong result.

What's driving growth?

A combination of them acquiring other companies and opening stores, which is their best bet really. They opened eight last year.There are many markets that they could expand into which haven't been tapped yet, so there's a lot of potential.

What's the stock worth?

I think it can get to about $25 in 12 months. They're currently trading at roughly $17.25. The stock showed strength recently - it hit a high on March 31 of $20.60 - and then pulled back, which makes for a good buying opportunity.