Whole Foods stock is having a big week, but investment bank UBS says don’t buy into the hype.
UBS equity analyst Michael Lasser sent a note to clients on April 10 reinforcing his “sell” rating and $US25 price target for the grocer, which would be a nearly 27% drop from today’s price of $US34.10.
Lasser’s note follows a 13D SEC filing that revealed that activist investment firm JANA Partners had taken an 8.3% stake in Whole Foods. The filing revealed that the firm wants to speed up the turnaround process at Whole Foods.
The stock moved nearly 10% higher after that news. Whole foods stock moved higher again Wednesday after Bloomberg reported that Amazon considered a bid for the supermarket last fall.
After taking JANA’s involvement into consideration, UBS is still sceptical about further gains in the stock, saying that the best possible outcome is likely “priced in:”
“While JANA’s plans are ambitious, we think WFM’s challenges run deep and that it needs to evolve its business model. With the stock trading at 25x its NTM EPS, we think a favourable outcome is already more than priced in. Thus, we think it’s best to be cautious.”
UBS recounted some of the struggles that have gotten Whole Foods into trouble in the last several years. One of the biggest problems the organic supermarket has faced has been the entrance of less expensive healthy shopping alternatives for consumers at stores such as Kroger and Sprouts Farmers Market.
The note suggested that to regain market share, Whole Foods would need to cut prices by 10-15%, which would have a significant negative impact on the grocer’s profit margins.
Whole Foods is up 1.64% today to $US34.10.