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Forget Whole Foods: This Stock Yields 6.4% And Could Jump 250%

By: StreetAuthority
Posted: 6/20/2013 3:30:00 PM
Referenced Stocks: RNDY;WFM;WMT

Grocery stores don't usually provoke thoughts of biggains from investors. And that's for a good reason. The domestic grocerymarket is relatively mature, withanalysts projecting annualsales growth of 1% in the next few years.

But there is one segment of the domestic grocery market that continues to experience explosive growth. With consumers increasingly prioritizing health and wellness, annual organic food sales are on pace to reach $42 billion in 2014, an increase of 31% from $29 billion in 2010.

Thatbullish trend has been fueling market-beating gains for leading organic grocer Whole Foods Market ( WFM ) .

Although Whole Foods is a great company thatwill continue toprofit from the bullish trend in organic food, itsmarket cap of $20 billion and status as alarge cap means it is probably past peak growth.

That's why investors looking for an opportunity with greater potential tocash in on the bullish trend in organic food should check out a small-cap grocer that is one ofWall Street 's best-kept secrets.

On the surface, Roundy's ( RNDY ) looks like a typical regional grocer. The company operates 160 stores under five names in Illinois, Wisconsin and Minnesota. But a closer look reveals that Mariano's Fresh Markets, one of Roundy's pet projects, is tapping into the bullish trend in organics and health foods. Investors have taken notice:

Much like Whole Foods, Mariano's Fresh Markets caters to higher-end consumers who prioritize quality over price. But what distinguishes the company from Whole Foods is its emphasis on value,offering a lower-cost alternative in a market whereunemployment remains high and wages stagnant. Mariano's also aims to get its high-end consumers to notice lower prices on regular items like toilet paper and laundry detergent to save them a trip to Costco (Nadsaq: COST) or Wal-Mart ( WMT ) .

The concept is ambitious, but the early results have been phenomenal. Mariano's grocery stores are producing an average $50 million in annual sales, nearly double the $20 million to $25 million of a typical grocery store. But in spite of those impressive sales volumes, Roundy's thinks Mariano's stores can continue to grow, projecting double-digitsame-store sales growth on an ongoingbasis , handily outpacing its industry and company peers.

That bullish outlook has been fueling new store openings, with Mariano's opening its ninth store in Chicago this spring after opening its first less than three years ago. Mariano's expects the Chicago market cansupport 30 stores, with a target of five new store openings ayear . The success of Mariano's in Chicago is considered a blueprint for national and international growth, creating huge opportunities for early investors in a concept that is seeing impressive gains in a highly competitive market.

But the Mariano's growth story isn't the only reason to be bullish on Roundy's. The company also boasts a strong core business as a leading regional grocer, holding the No. 1 or 2market share in five of its six primary markets. And Roundy's is focused on maintaining its leading position, implementing financial and operational strategies in 14 Milwaukee stores this year to drive sales andmargin growth. With the new program producing encouraging results, management expects to begin rolling out these initiatives in other locations in the second half of the year.

Roundy's also boasts a sizabledividend yield of 6.4%, which compares with its grocer peer average of 2% to 3%.Free cash flow is expected to top $50 million this year, so the company's annualdividend payment of $22 million looks sustainable.

Risks to Consider: Roundy's has a market cap of $243 million, making it vulnerable to the volatility that is common among small caps. Grocery stores are also being pressured on gross margins as the costs of food ingredients and commodities rise. 

Action to Take --> Despite the bullish outlook for Mariano's, leading position inmultiple markets and a huge dividend yield, Roundy's still looksundervalued , trading with a forwardP/E (price-to-earnings) ratio of just 8, a sharp discount to its peer average of 20. If Roundy's traded with the same valuation as its peers,shares could jump to $19, a 250%gain from current levels.