The Fresh Market Too Rich For My Blood
Results for The Fresh Market'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 up 13.6% to $259.5 million.
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 Market has been able beat analysts’ expectations in each of its last three quarters.
- Expensive stock. The Fresh Market ’s price-to-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 grow 18.6% to $1.24 in 2012.
- Increasing sales and profits but cash poor balance sheet. The Fresh Market 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. It's 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 Market 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 Market's EVA momentum was negative 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.