Sprouts Farmers Up 15% After Dipping On Amazon-Whole Foods News; A 'Pristine' Q2 Will Keep Them There

Sprouts Farmers Market Inc SFM's stock initially tumbled after its rival Whole Foods Market, Inc. WFM agreed to sell itself to Amazon.com, Inc. AMZN, but it has since rebounded 15 percent. As such, Jefferies' Christopher Mandeville downgrades his rating from Buy to Hold for valuation reasons but with a price target raised from $25 to $26.

Sprouts' stock is currently trading at a 12x EV/EBITDA NTM multiple, which is slightly below its three year average of 12.5x, the analyst explained. However, the valuation also represents a "premium" to other names in the sector but also implies it is "vulnerable to anything less than pristine" results.

Heading into the company's second-quarter report (scheduled for Aug. 3), the company is expected to deliver comps ahead of the 1.3 percent the Street is modeling, Mandeville continued. However, expectations for a bottom line beat isn't as certain as many rival grocery chains are being highly promotional in many of Sprouts' key markets.

The analyst is modeling the fresh, natural and organic grocery chain to earn $0.25 per share in the quarter (in-line with the Street) and $0.90 per share for the full year (in-line with the Street's range of $0.87–$0.91). Looking forward to 2018 expectations for a 14 percent earnings growth is "attainable," but there is little reason to believe in incremental upside, which is needed to justify a bullish rating.

"While every stock has its own story, we believe the takeaway is that prem. multiple names have a shrinking margin of error and are susceptible to sharp pullbacks on anything other than near perfection," the analyst concluded.

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