Shares of North Carolina-based upscale grocery chain The Fresh ÃÛÌÒ´«Ã½ (NASDAQ:) popped almost 11% Wednesday after a . Should you add it to your portfolio?
Results for The Fresh ÃÛÌÒ´«Ã½’s second quarter were ahead of expectations. Its net income of $10.5 million was 52% above the same quarter in 2010 and its EPS of $0.22 beat expectations by a penny. Meanwhile, its revenues were .
Is this quarterly performance enough to get you to invest? No. But here is one reason to consider it:
- Consistently good earnings reports. The Fresh ÃÛÌÒ´«Ã½ has been able beat analysts’ expectations in .
Three reasons to hesitate:
- Expensive stock. The Fresh ÃÛÌÒ´«Ã½ ’s price/earnings-to-growth ratio of 4.32 (where a PEG of 1.0 is considered fairly priced) means its stock price is very expensive. It currently has a P/E of 80.4, and its earnings per share are expected to .
- Increasing sales and profits but cash-poor balance sheet. The Fresh ÃÛÌÒ´«Ã½ has been increasing sales and profits. Its revenue has grown at a 20.6% annual rate, from $460 million (2006) to $974 million (2010), while its net income has increased at a 4.7% annual rate, from $20 million (2006) to $24 million (2010) — yielding a slim 2% net profit margin. Its debt has fallen from $130 million (2008) to $82 million (2010), while its cash declined from $6 million (2008) to $4 million (2010).
- Out-earning its cost of capital — but getting worse. The Fresh ÃÛÌÒ´«Ã½ is earning more than its cost of capital — but it’s getting worse. How so? It’s producing negative EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, The Fresh ÃÛÌÒ´«Ã½’s EVA momentum was -2%, based on six months’ annualized 2010 revenue of $933 million, and EVA that fell from six months’ annualized 2010 $45 million to six months’ annualized 2011 $27 million, using a 10% weighted average cost of capital.
At its current valuation, The Fresh ÃÛÌÒ´«Ã½ is way too rich for my blood, and it needs to tighten its control of expenses and boost its return on capital. I doubt it could spike earnings growth enough to justify such a high P/E, but I might consider it again if the price comes way down.
Peter Cohan has no financial interest in the securities mentioned.
