Stock Analysis

Sprouts Farmers Market, Inc.'s (NASDAQ:SFM) 26% Price Boost Is Out Of Tune With Earnings

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Despite an already strong run, Sprouts Farmers Market, Inc. (NASDAQ:SFM) shares have been powering on, with a gain of 26% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 86% in the last year.

Since its price has surged higher, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Sprouts Farmers Market as a stock to avoid entirely with its 24.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Sprouts Farmers Market has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Sprouts Farmers Market

NasdaqGS:SFM Price to Earnings Ratio vs Industry March 2nd 2024
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sprouts Farmers Market.

Is There Enough Growth For Sprouts Farmers Market?

In order to justify its P/E ratio, Sprouts Farmers Market would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a decent 4.7% gain to the company's bottom line. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 10% each year over the next three years. That's shaping up to be similar to the 11% per year growth forecast for the broader market.

In light of this, it's curious that Sprouts Farmers Market's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

Sprouts Farmers Market's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Sprouts Farmers Market's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Sprouts Farmers Market with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Sprouts Farmers Market. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Valuation is complex, but we're helping make it simple.

Find out whether Sprouts Farmers Market is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.