The Kroger Co. (NYSE:KR) shares are up more than 2.30% this year and recently increased 0.32% or $0.09 to settle at $28.08. Sprouts Farmers Market, Inc. (NASDAQ:SFM), on the other hand, is up 2.09% year to date as of 01/10/2018. It currently trades at $24.86 and has returned 2.60% 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. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect KR to grow earnings at a -1.48% 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
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., 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.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. 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 -0.68% 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 are important because they reveal the financial health of a company. KR has a current ratio of 0.80 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 2.38 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 13.76, a P/B of 3.99, and a P/S of 0.21, compared to a forward P/E of 21.69, a P/B of 5.42, and a P/S of 0.73 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. KR is currently priced at a 4.35% to its one-year price target of 26.91. Comparatively, SFM is -0.16% relative to its price target of 24.90. 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 2.40 for KR and 2.10 for SFM, which implies that analysts are more bullish on the outlook for KR.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. KR has a beta of 0.89 and SFM’s beta is 0.66. SFM’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. KR has a short ratio of 3.29 compared to a short interest of 7.61 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, AET has better sentiment signals based on short interest.