I’m a big proponent of a healthy lifestyle. I love staying active with my kids and am big on running. While I’m certainly guilty of grabbing a doughnut or fast food lunch on occasion, I try to keep a healthy diet. After all, there are big risks from poor eating habits, including obesity, diabetes, high blood pressure and more.
Chances are you think also more about what you’re eating than you used to. More and more people are trying to live healthier with public awareness at an all-time high, thanks in part to prominent figures putting a spotlight on this issue — like First Lady Michelle Obama’s ‘Let’s Move!’ Program.
This trend toward healthier eating includes much greater consumption of organic foods. According to the Organic Trade Association, 81% of households now buy organic food at least some of the time. That number should keep getting bigger, as industry research firms expect sales of organic food to increase 14% per year from 2013 to 2018.
These kinds of numbers indicate a robust trend, not merely a passing fancy. So, it catches my attention as an investor. One of my favorite companies benefitting from this health-changing trend is Sprouts Farmers Market (SFM), which fell earlier this year but has excellent potential going forward. A just-announced secondary offering also knocked Sprouts Farmers Market stock down, providing what I believe is an excellent buying opportunity.
Sprouts Farmers Market operates 180 healthy grocery stores, primarily located in California (77), Texas (30) and Arizona (27). Sprouts Farmers Market offers pretty much everything — including fresh produce, bulk foods, packaged foods, fresh meats and seafood, and vitamins and supplements — and has been named one of the top five supermarkets in the country by Consumer Reports.
To me, Sprouts Farmers Market separates itself from the competition by offering combination of high-quality goods and reasonable prices. Lower prices make Sprouts Farmers Market’s gross margins somewhat lower than those of Whole Foods (WFM), but Sprouts Farmers Market still generates an excellent return on investment through a lower overall cost structure.
Sprouts Farmers Market’s third-quarter results, released Nov. 6, reinforced my outlook. Sales increased 21% to $766.4 million, ahead of the Street’s forecast. Earnings of 18 cents per share also bested expectations by 2 cents. Guidance for the current quarter was in line, and for the full year, Sprouts Farmers Market management is looking for earnings of 67 – 68 cents per share. Analysts raised their full-year estimates following the report.
Sprouts Farmers Market stock initially traded down the following morning, but buyers stepped in — SFM bounced back quickly. Then, on Nov. 11, shares slipped again when Sprouts Farmers Market announced a secondary offering of 15 million shares to be sold by private equity firm Apollo Global Management (APO).
I expect the overhang to be temporary, and growth should stay strong thanks to the pronounced trend to healthier eating and SFM’s focus on organic foods at reasonable prices. Buyers stepped in quickly after the earnings report, and I see that happening again, which makes Sprouts Farmers Market a “strong buy,” especially if you can get it under $30.