Whole Foods Shares Rally Following Credit Suisse Upgrade

Shares of Whole Foods Market, Inc. WFM have surged more than 5 percent after Credit Suisse upgraded the stock to Outperform from Neutral, saying a "50 percent drop in the stock price from its peak provides an attractive entry point."

With fiscal 2015 sales of $15 billion, the company has 446 stores in the United States, Canada, and the United Kingdom. The company's 365 and 365 Organic Everyday Day Value brands account for approximately half of its brand items.

"We see a unique opportunity to own this leading specialty food player while still in the early stages of a repositioning that should reinvigorate growth," analyst Edward Kelly wrote in a note.

Kelly said Whole Foods is cutting prices, accelerating private brand penetration, aggressively reducing costs, enhancing marketing, investing in technology, and rolling out a value format in 365.

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"The company has been slow to anticipate accelerating competition, but this innovative management team's aggressive response looks supportive of a return to growth," Kelly highlighted.

Though Whole Food's comps have been weak, recent strategic initiatives and easing comparisons may indicate a bottom is near. Kelly, while comparing the situation to The Kroger Co KR, said the early stages of its repositioning suggests the stock could rally as comps improve.

"The return of EBITDA growth is the catalyst for a more sustained recovery," the analyst noted.

The company is betting on its 365 concept that allows Whole Foods to reach markets where demographic constraints make its core stores uneconomical.

"While we still have questions around the 1,200-store target, 365 could dramatically expand the new store opportunity," Kelly elaborated.

Though the earnings could remain choppy near-term, the analyst sees a recovery taking hold within 18 months. Kelly sees 2016 earnings of $1.50 a share and 2017 EPS of $1.42, while consensus estimate calls for EPS of $1.53 and $1.58, respectively.

Kelly also raised the price target to $40 from $30.

"Our $40 target price (up from $30) represents 24% upside, while downside seems limited by poor sentiment," the analyst added.