The Fresh Market Inc (TFM), Whole Foods Market, Inc. (WFM), Sprouts Farmers Market Inc (SFM): This IPO Sprouted Too High

After the 123% gain following the IPO, Sprouts Farmers Market Inc (NASDAQ:SFM) appears to have sprouted too far for new investors. The company offers a compelling shopping experience and attractive pricing, but can it grow fast enough to justify a market cap exceeding $6 billion with revenue of only $2 billion last year.

Sprouts Farmers Market Inc (NASDAQ:SFM) competes in the fast growing and suddenly competitive natural and organic grocery sector against the likes of The Fresh Market Inc (NASDAQ:TFM), Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC) and Whole Foods Market, Inc. (NASDAQ:WFM). The sector has become pricey so is the stock or any of the stocks worth buying now?

Basic details

Sprouts Farmers Market Inc (NASDAQ:SFM) now operates 163 stores in only eight states with plans to grow the store base at a 12% annual rate. The company will open 19 stores for the year and 20 stores in 2014 with the eventual goal of reaching 1,200 locations in the U.S. Quarterly revenue has recently topped $600 million with Q1 adjusted net income growing from $16.6 million to $19.6 million or roughly 18%.

The company raised $344 million in net proceeds by selling 20.5 million shares at $18. The proceeds from the offering will be used to pay down debt and allow for a reduction in the interest rate on a credit facility. Apollo Management is a large shareholder that could provide selling pressure in the future with the stock at these levels.

The stock is valued at over $6 billion or roughly 3 times the trailing revenue base. As an example, Whole Foods Market, Inc. (NASDAQ:WFM) only trades at 1.5 times expected revenue. The Fresh Market Inc (NASDAQ:TFM) has been public for a while and it trades at only 1.7 times revenue.

Sector potential

With the massive store growth of the smaller firms of The Fresh Market Inc (NASDAQ:TFM), Sprouts Farmers Market Inc (NASDAQ:SFM), and Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC), the sector has the potential to grab a larger portion of the overall $600 billion U.S. supermarket industry. According to Nutrition Business Journal, spending on the natural and organic sector has been growing at a rate of 10% annually with sales only reaching $43 billion in 2011. With less than 10% of the total supermarket sector, the natural and organic industry will benefit from the greater access to the produce that the new stores bring.

Rich valuation

Investors paying more than double the IPO price of $18 must be salivating over the growth potential of Sprouts Farmers Market Inc (NASDAQ:SFM) with locations in only eight states. This compares favorably to Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC) in 13 states and The Fresh Market Inc (NASDAQ:TFM) with locations in just over 20 states. Ironically, all three grocers have recently ventured into Oklahoma with plans for multiple locations in Tulsa. This state and the metro areas of Oklahoma City and Tulsa could provide the ultimate research as to which operation will ultimately succeed in dominating the plans for nationwide rollouts.