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

As mentioned above, Sprouts Farmers Market Inc (NASDAQ:SFM) trades at market value exceeding $6 billion with revenues of $2 billion in 2012. The company reported revenue of $622 million for the quarter ending June 30 with growth of 22%. This compares to a sector that generally trades at 2 times trailing revenue making Sprouts the most expensive in the group. Especially considering the company isn’t overly profitable with razor thin profit margins in 2012 of around 2%. Hard to fathom that adjusted earnings of $45 million could justify a valuation of $6 billion in the grocery sector no matter the strong growth potential. The Q1 results provide some hope as adjusted profit margins hit 3.4%.

Bottom line

Based on recent shopping experiences at a new Sprouts store in my metro area, it was shocking to see the IPO price above the range. The surprising part was the magnitude and valuation afforded the stock compared to other industry players. Sprouts appears a top notch operator, but razor thin profit margins make the current valuation difficult to swallow. Sure the $6 billion stock has all the makings of competing well against sector leader Whole Foods Market, Inc. (NASDAQ:WFM) down the road, but investors need to wait for a discount on the stock to justify buying. Remember that Whole Foods has mentioned more competitive pricing and that could impact competitors such as Sprouts.

The article This IPO Sprouted Too High originally appeared on Fool.com and is written by Mark Holder.

Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends The Fresh Market. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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