Why Finimizer Rishi Recommends Sprouts Farmers Market Shares

Why Finimizer Rishi Recommends Sprouts Farmers Market Shares

almost 3 years ago2 mins

Welcome to a new mini-series from the Finimize Community: Finimize Pitch Club. Each week, community members can submit their investing ideas in order to get feedback from the community and practise building a more disciplined approach to their investments.

This is an educational exercise and the investments have not been vetted by our analysts

Today’s pitch comes from community member Rishi Sodha, a recruitment consultant by profession but an amateur investor in stocks, exchange-traded funds (ETFs), and crypto.

What’s the pitch?

Sprouts Farmers Market (ticker: SFM) with price target of $40, implying 54% price upside over the short term i.e. 1 - 1.5 years.

Who are they?

Established in 2002 in the US, retail business model selling purely organic and natural products. Supplied by local farmers who have substantial production facilities to meet demand, the company also has an online model to distribute to the rest of the US. Circa 350 stores. $6.5bn in sales in 2020. 

Tell us your three-point investment thesis

1/ Sales growth YOY, 15% increase from 2019 to $6.5bn. Adapted to Covid by successfully utilising ecommerce, achieving 340% growth in 2020 compared to 2019.

2/ Solid margins. gross margin = circa 30%, operating margin = circa 5%, net margin = circa 3% , Free Cash Flow Margin = circa 2.5%

3/ US Organic market is over $200bn, so currently SFM has about 3% of the market, huge growth potential as they expand.

What are the key events you’re watching?

Watching out for expansion during 2021, they opened 22 new stores in 2020 and are targeting annual unit growth beyond 2021 of 10%+. In the long-term, something to watch out for is potential acquisitions from a bigger player that sees the huge growth potential in SFM

What’s the upside potential if your thesis is correct?

If they continue to grow at the rate they expect in terms of online sales and store expansion, as well as continue to show positive revenue and profit, I believe this stock should be close to $40.

What are the big risk factors you’ve identified and how do you plan to mitigate them?

Competition will always be fierce in this market place, with conscientious/ethical consumption raising awareness they have positioned themselves well with a trusted brand name in the marketplace. They will need to continue increasing market share YOY to ensure they do not get diluted in the market as competition rises.

Community Sentiment: Vote on whether this is a buy/sell here

NOTE: This stock pitch was submitted on April 29th, 2021.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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