8 Reasons Sprouts Farmers Market Is A Screaming Buy

In a report issued Tuesday, Deutsche Bank analysts Karen Short, Ryan Gilligan and Shane Higgins upgraded their rating on shares of Sprouts Farmers Market Inc (NASDAQ: SFM) from Hold to Buy, while boosting their price target from $20.00 to $24.00

The analysts:

• Expect the company to regain momentum on the back of eight elements.
• Believe valuation relative to the company’s ROIC, history and peers is very alluring.
• The business’ fundamentals are somewhat insulated from the global market weakness because the company “(with its attractive price points) is a likely beneficiary of the US middle-income consumer feeling less confident.”

Related Link: America Wants More Organic Products Than Anyone Else: Here's How To Play It

8 Reasons SFM Should Regain Momentum

1) The analysts believe fears related to Sprouts Farmers Market’s competitiveness as the market becomes more disputed are “extremely overblown.”

2) Although Kroger Co (NYSE: KR) is getting more aggressive on produce pricing, the experts still see plenty of share left for both of them to take from weaker competitors in the arena.

3) The second-quarter comp miss was mainly driven by deflation. However, a deflation in produce of roughly 10 percent is not normal. Thus, the analysts are “confident the comp will regain momentum once deflation subsides given the strong traffic trends.”

4) Footsteps don’t lie: The company’s two-year stacked traffic of +7.6 percent in the second quarter remains a best-in-class.

5) Short, Gilligan and Higgins think product deflation is already starting to subside.

6) They also believe guidance “conservatively reflects an elevated competitive environment (and the typical 20%-25% gap in produce vs. conventionals) –more specifically, guidance reflects an ~8.0%-8.5% margin,” which they consider reasonable and/or sustainable.

7) The firm’s fiscal 2016 EPS estimate was too conservative, the report assures. Consequently, they are boosting it from $0.91 to $0.96 (8.2 percent EBITDA margin).

8) Deutsche Bank considers there are substantial opportunities to add supplementary traffic-driving categories in the stores, and thinks “this is a priority for the reconfigured leadership team”