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Despite SFM’s Cost, It Has a Better Earnings Potential than Its Peers

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Jul. 25 2017, Updated 8:06 a.m. ET

Growth and earnings summary of Sprouts Farmers Market

As we noted earlier in this series, Sprouts Farmers Market (SFM) has posted industry-leading comps and margins over the past few years. The company managed positive comps despite persistent headwinds in the retail food space and expects them to remain in positive territory in fiscal 2017. SFM’s management has predicted its top line to grow in the 12.5%–13.5% range. Its earnings per share (or EPS) are likely to improve ~9.0% during the year.

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Comparing valuations

Sprouts Farmers Market (SFM) is valued at a one-year forward price-to-earnings ratio (or PE) of 26.0x, which is close to the upper end of its 52-week PE range of 20.0x–27.0x. However, the company is still cheaper historically, as its three-year average PE stands close to 29.0x.

SFM is currently cheaper when compared to its larger organic competitor Whole Foods Market (WFM), which is trading at 33.0x thanks to its acquisition by Amazon (AMZN) last month.

However, Kroger (KR), SuperValu (SVU), and Walmart (WMT) trade at a discount to SFM and are valued at 11.2x, 9.0x, and 17.3x, respectively.

Comparing earnings potential

Looking at the near-term horizon of the next 12 months (or NTM), Sprouts Farmers Market has a better earnings potential than its retail food peers. Its earnings are expected to rise 7.8% over the next 12 months.

In comparison, Kroger, Whole Foods, and Walmart are likely to report 1.4%, -6.4%, and 1.5% growth in earnings, respectively.

Investors looking for diversified exposure to SFM can look at the First Trust Consumer Staples AlphaDEX ETF (FXG). SFM comprises ~3% of FXG’s portfolio.

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