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Sprouts Posts a Healthy IPO, Gains 102%

The company is the latest to ride the health wave


The dealmakers at Apollo should be in a good mood today. One of its portfolio companies, Sprouts Farmers Market (SFM), has pulled off hot IPO. The company priced 18.5 million shares at $18, which was above the expected $14 to $16 range. So far in today’s trading, the shares are up a sizzling 102%.

Sprouts is a top organic and natural food grocer. Founded in 1943, the company now operates 163 locations, many of them in the Southwest. Each has a small-box format that averages about 27,500 square feet. This provides a farmers market feel but also has enough room to provide a wide-array of offerings like bakery items, vitamins and supplements, beer, wine, meat, seafood and even body care. The shelves are also chock-full of national brands.

The strategy has been spot-on. Keep in mind that comparable store sales growth has continued for 25 consecutive quarters. In fiscal 2012, they rose a solid 9.7%.

A couple of months ago, I looked at Sprout when it filed for an IPO. I noted back then that similar companies had scored great IPOs, and suggested that Sprout could do the same. This chart shows exactly how good grocery IPOs have been this year:

Company Ticker First Day Return Overall Return
Fairway Group FWM 33.5% 92.8%
Fresh Market TFM 45.9% 66.6%
Natural Grocers by Vitamin Cottage NGVC 19.1% 138.9%

And while each one has gone on to post nice returns after their initial first-day spikes, none come even close to the performance of Sprouts.

In other words, investors need to be mindful of the valuation. At the current stock price, the market cap is at about $5.6 billion. This puts the price-to-sales ratio at 2.8, which compares to Whole Foods’ (WFM) 1.65X. FWM and TFM are about the same, and NGVC is somewhat higher at 2.1X.

In other words, SFM is far from cheap. So, if you are thinking of buying shares, it’s probably best to hold off until the valuation pulls back, which often happens for IPOs as hot as this one.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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