Sprouts Farmers Market: An Undervalued Company With Significant Upside Potential

Excerpt:

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Investment Thesis

I give Sprouts Farmers Market (NASDAQ:SFM) a strong buy rating due to the company's impressive annual free cash flow, their high-quality earnings, their shares trading at a discount of $111.39, 42% below their intrinsic value, with significant upside potential on the horizon dependent upon their private label store brands continuing to increase the company's gross profit margins.

Background

I wrote an article on Sprouts back in December noting that, though Sprouts had plenty of momentum and impressive numbers on their 10-K filed in February 2024, my discounted cash flow [DCF] calculated an intrinsic value of $116.81, with the shares overvalued by 10% above their then price of $128.47. Thus, I gave the company a hold rating. But I am now changing my thesis from neutral to bullish.

Since my last article, Sprouts' shares peaked at $177.12 back on February 14th, while afterwards falling quite drastically and climbing upwards again to their current share price of $153.18.

I liked the numbers I saw on the company's previous 10-K, and I knew that, once Sprouts released their latest 10-K in 2025, I would go back and give the company another valuation using better assumptions and updated numbers. And now is that time, so let's dive into the numbers:

The Annual Free Cash Flow and Earnings Quality

We'll start with the company's annual free cash flow…