This low-cost organic grocer beat analysts’ estimates by two cents in its most recent quarter. According to Insider Monkey, there were 22 hedge funds in the stock at the end of the third quarter, up from 14 in the prior quarter.
Sprouts Farmers Market (SFM)
From Game Changers
Sprouts Farmers Market (SFM), has emerged as a top stock and top natural grocer. Sprouts was founded in 2001 by a family that had previously started and sold another specialty grocery store, Henry’s Farmers Market. In 2011, private equity firm Apollo Global Management purchased Sprouts and brought about a merger between Sprouts and Henry’s Farmers Market. The resulting company, Sprouts Farmers Market, then went public in 2013 in what would become the most successful IPO in years. The stock rose 123% during its first day of trading and, at the time, had roughly 160 stores in eight states.
Catalyst 1: Natural foods for the masses. Sprouts has pursued a different strategy than Whole Foods. Sprouts brings natural and organic goods to the masses. With lower prices, a greater reliance on “local” over “organic” and a focus on value over premium offerings, Sprouts is the mainstream alternative to Whole Foods.
Catalyst 2: Impressive growth, reasonable valuation. While Sprouts is growing revenues at nearly 18%, Whole Foods’ revenue growth has slowed to roughly 5.6%. Since the middle of 2014, Sprouts’ revenue growth has fallen from just under 20% to just under 18%, Whole Foods’ revenue growth has fallen by nearly half from around 10% to around 5.6%.
Sprouts trades at 26 times fiscal 2016 earnings of $0.96 per share; 22 times fiscal 2017 earnings of $1.14 per share; and 18.8 times fiscal 2018 earnings of $1.34 per share. Whole Foods is trading at 18.9 times fiscal 2016 earnings of $1.59 per share; 18.3 times fiscal 2017 earnings of $1.64 per share; and 17 times fiscal 2018 earnings of $1.77 per share.
I think Sprouts stock is cheap relative to its growth and I know Sprouts’ board agrees with me—they just authorized a $150 million buyback program.
Catalyst 3: The growth is just beginning. According to its own news releases, Whole Foods operates 434 stores across the U.S. with 10 in Canada and 9 in the U.K. Meanwhile, Sprouts operates 212 stores across 13 states and zero outside of the U.S. Sprouts expects to open one final store during the fourth quarter of 2015, bringing its total new stores in 2015 to 27.
This means that Sprouts will have increased its store count by 14.5% during 2015. And with comparable (same-store) sales growth of 5.8% over one year and 14.9% over two years, it’s clear that each Sprouts store opening only drives the growth machine higher and higher.
Buy Sprouts Farmers Market (NASDAQ: SFM) stock for $25.25
Ian Wyatt and Jay Taylor, Game Changers, www.wyattresearch.com, 866-447-8625, December 9, 2015