– By GF Value
The stock of Sprouts Farmers Market (NAS:SFM, 30-year Financials) gives every indication of being fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $26.42 per share and the market cap of $3.1 billion, Sprouts Farmers Market stock appears to be fairly valued. GF Value for Sprouts Farmers Market is shown in the chart below.
Because Sprouts Farmers Market is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 17.4% over the past three years and is estimated to grow 5.29% annually over the next three to five years.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company’s financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company’s financial strength. Sprouts Farmers Market has a cash-to-debt ratio of 0.12, which ranks worse than 81% of the companies in the industry of Retail – Defensive. Based on this, GuruFocus ranks Sprouts Farmers Market’s financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Sprouts Farmers Market over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Sprouts Farmers Market has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $6.5 billion and earnings of $2.44 a share. Its operating margin is 6.05%, which ranks better than 79% of the companies in the industry of Retail – Defensive. Overall, the profitability of Sprouts Farmers Market is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Sprouts Farmers Market over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Sprouts Farmers Market is 17.4%, which ranks better than 88% of the companies in the industry of Retail – Defensive. The 3-year average EBITDA growth rate is 30.6%, which ranks better than 82% of the companies in the industry of Retail – Defensive.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Sprouts Farmers Market’s ROIC is 11.82 while its WACC came in at 1.79. The historical ROIC vs WACC comparison of Sprouts Farmers Market is shown below:
In short, the stock of Sprouts Farmers Market (NAS:SFM, 30-year Financials) shows every sign of being fairly valued. The company’s financial condition is fair and its profitability is strong. Its growth ranks better than 82% of the companies in the industry of Retail – Defensive. To learn more about Sprouts Farmers Market stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.