Who Is the Next Whole Foods (WFM)? Sprouts, A Natural And Organic Grocer Gets Interest From Banks And Investors

Swiss bank UBS AG (VTX:UBSN) and Goldman Sachs Group Inc. (NYSE:GS) both opened coverage of Sprouts Farmers Market Inc. (NASDAQ:SFM) on Tuesday, in a sign of fresh interest and better business for organic grocers.

UBS analysts in particular are upbeat about Sprouts’ prospects. They wrote in their initial research note that Sprouts can easily grow 12 percent annually for 15 years, to reach 1,200 stores from its current 160 locations.

“Sprouts is perfectly… positioned as the low-priced natural/organic grocer, focused on fresh produce,” wrote UBS analysts of the firm, which went public in a $344 million offering in early August.

Lack of access and affordability have traditionally hampered natural and organic grocery sales, restricting their share to just 7 percent of all grocery sales currently. According to the note, a 1 percent price cut in such produce has historically led to a 5 percent sales boost.

UBS analysts also predicted that natural and organic product sales could grow 10 percent per year for the next decade.

“Specialized chains like Sprouts and Whole Foods have plenty of room to grow,” they wrote. “Sprouts and Whole Foods do not share as many customers as the market might think.”

Sprouts’ goal of 1,200 stores in the United States compares with Whole Foods Market’s (NASDAQ:WFM) goal of 1,000 stores, The Fresh Market Inc.’s (NASDAQ:TFM) goal of 500 stores, and unknown targets for the private Trader Joe’s Company. Trader Joe's owned 375 stores in 2012, estimated Supermarket News.

UBS analysts also expect robust earnings growth for Sprouts in coming months and years.

In its first quarterly results, Sprouts reported an encouraging 10.8 percent comparable sales growth from the year before, and a powerful earnings per share upswing of 100 percent.

Sprouts’ problem, however, is that it could grow too quickly, with executives unable to manage the growth expertly, wrote UBS analysts.

In starting their coverage, Goldman Sachs analysts praised the company’s growth potential and competitive edge but noted that the market had already recognized the strength of the company, according to Benzinga.

Goldman Sachs analysts maintained a neutral rating on Sprouts’ stock, noting strong recent investor interest in the company. UBS maintained the same recommendation.

The recent interest in Sprouts is part of a broader industry trend, according to the UBS note.

“We believe the U.S. market is still in the early stages of consumer adoption [of natural and organic products],” wrote the analysts, predicting further growth in the $600 billion food retail industry. “We are still only at the beginning stages of mass-market adoption,” they wrote.

Headquartered in Phoenix, Arizona, Sprout's stock opened at $38.1 per share on Tuesday.