The Kroger Co. (NYSE:KR) shares are down more than -24.02% this year and recently increased 0.74% or $0.2 to settle at $26.42. Sprouts Farmers Market, Inc. (NASDAQ:SFM), on the other hand, is up 25.37% year to date as of 12/05/2017. It currently trades at $23.81 and has returned 5.33% during the past week.
The Kroger Co. (NYSE:KR) and Sprouts Farmers Market, Inc. (NASDAQ:SFM) are the two most active stocks in the Grocery Stores industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect KR to grow earnings at a -2.30% annual rate over the next 5 years. Comparatively, SFM is expected to grow at a 12.73% annual rate. All else equal, SFM’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 6.91% for Sprouts Farmers Market, Inc. (SFM). KR’s ROI is 11.90% while SFM has a ROI of 13.10%. The interpretation is that SFM’s business generates a higher return on investment than KR’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. KR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.89. Comparatively, SFM’s free cash flow per share was +0.28. On a percent-of-sales basis, KR’s free cash flow was -0.69% while SFM converted 0.92% of its revenues into cash flow. This means that, for a given level of sales, SFM is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. KR has a current ratio of 0.90 compared to 1.00 for SFM. This means that SFM can more easily cover its most immediate liabilities over the next twelve months. KR’s debt-to-equity ratio is 2.28 versus a D/E of 0.79 for SFM. KR is therefore the more solvent of the two companies, and has lower financial risk.
KR trades at a forward P/E of 13.54, a P/B of 3.82, and a P/S of 0.20, compared to a forward P/E of 21.22, a P/B of 5.17, and a P/S of 0.69 for SFM. KR is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. KR is currently priced at a 10.08% to its one-year price target of 24.00. Comparatively, SFM is -2.22% relative to its price target of 24.35. This suggests that SFM is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for KR and 2.10 for SFM, which implies that analysts are more bullish on the outlook for KR.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. KR has a beta of 0.86 and SFM’s beta is 0.60. SFM’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. KR has a short ratio of 4.12 compared to a short interest of 6.96 for SFM. This implies that the market is currently less bearish on the outlook for KR.
Sprouts Farmers Market, Inc. (NASDAQ:SFM) beats The Kroger Co. (NYSE:KR) on a total of 10 of the 14 factors compared between the two stocks. SFM , is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, KR is the cheaper of the two stocks on an earnings, book value and sales basis, SFM is more undervalued relative to its price target. Finally, CNC has better sentiment signals based on short interest.