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Whole Foods vs. Burger King, organic vs. fast food: where's the value?

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french fries and hamburgerWhat was the biggest thing in earnings news yesterday? Well, depending on your investing bias, it was either Burger King (BKC), which reported its first public quarter with a seven cents per share loss; or Whole Foods (WFMI), which is down big after reporting a good profit yesterday, but missing estimates on sales and offering what analysts are calling "confusing" guidance for full-year 2006 and 2007 sales. Bear Stearns rates Whole Foods at "underperform" and UBS has a "neutral" rating.

The stocks were both down sharply yesterday; Burger King was down $2.01, or 13%, to $13.24 (with a slight recovery in after-hours trading); and Whole Foods fell $6.76, or nearly 12%, to $50.75.

Let's say you're the average food investor, wondering: should I put my money where my health is? Or go for the fatty deep-fried flavor? Where's the value?

Choosing between Burger King and Whole Foods could be viewed from either a "values" (the integrity of the profit) or a "value" (the amount of the profit) standpont. I'm sure I won't be telling you anything new when I say that the values of Whole Foods are on one end of the positive spectrum, while Burger King is on the other. Whole Foods, after all, makes its money selling organic and otherwise more healthful foodstuffs, whereas Burger King is literally the King of the hydrogenated fat and the high fructose calorie extravaganza.

That's not where the values argument ends, however. Burger King (like other fast food companies like it) makes profit largely from a very low-income customer base; essentially providing unhealthy but cheap sustenance to the millions who can't afford to eat well. Whole Foods, it could be argued, makes profit by charging a high price for good food, profiting from the very folk who can afford to be profited from.

In my personal "values" judgment, Whole Foods gets the nod here. I'd rather make a buck off the well-off than the low-income, even ignoring the healthy vs. not so much argument.

But more importantly: does either stock hold "value", or, is it a good buy? Whole Foods is trading at a P/E ratio of about 43x earnings, whereas Burger King is at a much higher 56x. Anything over 40 is tough for me to justify, and 50s and higher is crazy (in my opinion) unless a company is at the beginnings of a high-octane growth stage. Burger King high-octane? I just don't see it. In my neighborhood, there are new Starbucks' opening every month or so and the spread of pizza and pasta chains is truly mind-boggling. I find a new place to get bubble tea or single-plantation coffee (along with the ever-present wifi) every week. But Burger King? There's one in my neighborhood that's been there since the 60s or 70s; I don't even think they've changed the decor.

I don't see great untapped international markets for Burger King, nor do I see a nimble market dominator. The joint makes a variation on the same burgers, fries, and chicken strips that they have for decades.

[Updated to add: after reviewing financial statements, I've found the real numbers here: Burger King has modestly increased company-owned stores, from 1,187 to 1,240 worldwide, in the past year; whereas franchise stores actually fell, from 9,917 to 9,889 worldwide. Whole Foods has 173 stores in 31 states and D.C., with 10 in Canada and the U.K. and has opened seven stores year-to-date, a much higher growth rate and the obvious: a lot of room to grow further.]

Whole Foods, on the other hand, is on the move. Their Portland store in the ultra-trendy Pearl District opened a few years ago, and they recently announced plans for a second outlet. That leaves a dozen or more high-income neighborhoods ready for the picking, and the chain clearly dominates the organic supermarket industry. That's just in Portland. National and international markets are only beginning to whet their appetite for Whole Foods' assortment of healthy and gourmet options. As the anti-GMO movement increases (it's particularly frenetic in the U.K. and the rest of Western Europe today), that appetite will only increase.

At 43x earnings, Whole Foods seems to be a decent buy and management seems both committed and consistent. In the values/value battle of the foodstuffs, I give WFMI a TKO.

Sarah Gilbert has a Wharton MBA and worked in investment banking for several years, then at a series of increasingly edgy startups before finding her calling, producing blogs for AOL. She doesn't own stock in either of the companies mentioned -- yet.

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Last updated: November 26, 2009: 09:57 AM

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