Sprouts Vs. Walmart: Which Is Best In A Whole Foods-Amazon World?

While Wells Fargo senior analyst Zachary Fadem sees Amazon.com, Inc. AMZN's potential acquisition of Whole Foods Market, Inc. WFM comprising 3 percent of the grocery industry, he has listed Sprouts Farmers Market Inc SFM as a top pick and reiterated his Outperform rating.

“Sprouts Farmers Market is our top pick in grocery owing to its high growth characteristics, N&O/value positioning and valuation floor from industry consolidation. We remain more cautious on Wal-Mart Stores Inc WMT and Costco Wholesale Corporation COST, owing primarily to relative valuation, and would await more attractive entry points,” he said.

Is Sprouts A Potential Acquisition Target?

Fadem sees the grocery industry consolidating in the future, and with Sprouts' strong fundamentals, this raises its valuation despite the industry’s current competitive landscape (check out Fadem's track record).

Sprouts is currently “well-positioned with differentiated with differentiated and expanding product offerings, focus on fresh/value (attractive higher growth sub-segments) and growth opportunities from private label, prepared foods and digital initiatives,” he noted.

Walmart Cannot Keep Up

Walmart and Amazon have been competing for several years, but Fadem still sees Amazon staying a couple moves ahead.

He pointed out Whole Foods will now be able to offer “Prime discounts for those with SNAP benefits compete directly with Walmart’s lower income core (Walmart’s traffic has been 85%+ correlated with low income consumer confidence; we estimate SNAP=4.5% of WMT US sales).” Additionally, Walmart is currently trading at a very steep valuation, which pushed Fadem to issue a Market Perform rating on Walmart.

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Amazon's Acquisition Of Whole Foods Should Create Lower Prices, Offer Better Consumer Experience Sprouts Farmers Market Downgraded, But Fundamentals Remain Strong As Ever ______ Image Credit: By Littletung (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons