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  1. Home
  2. / Investing
  3. / Consumer Staples

Walmart Could Pick Up Sprouts ... or Not

It could counter the Amazon-Whole Foods deal by buying Sprouts or just watch and learn.
By ED PONSI
Jun 27, 2017 | 03:42 PM EDT
Stocks quotes in this article: WMT, WFM, AMZN, SFM, SBUX

This commentary originally appeared on Real Money Pro. Click here to learn about this dynamic market information service for active traders.

Late last week, Reuters reported that Walmart Stores Inc. (WMT) is not considering making a competing bid for Whole Foods Markets Inc. (WFM) . The organic grocery chain already has accepted a $13.7-billion buyout offer from Amazon.com Inc. (AMZN) , and rumors of a rival bid drove Whole Foods shares above their projected takeout price. (Amazon is part of the Trifecta Stocks portfolio.)

As a Walmart long, I'm pleased that the company isn't considering a bidding war with Amazon. Whole Foods is already trading at 34 times trailing earnings; if Walmart were to place a competing bid for $16 billion, that might be enough to get the deal done.

Or, Walmart could consider purchasing Sprouts Farmers Market Inc. (SFM) instead. Sprouts' market capitalization is just over $3 billion and its valuation -- at 28 times trailing earnings -- is more reasonable than Whole Foods.

News of the Amazon-Whole Foods merger sent Sprouts reeling, when it actually should make the stock a more attractive takeover candidate. This is true not just for Walmart but for any company that wishes to compete with Amazon. The stock is still about 10% below its price prior to the release of the Amazon-Whole Foods merger news.

After the news hit, Sprouts became oversold, according to its RSI (relative strength index) indicator (shaded yellow). The stock fell beneath its 50-day (blue) and its 200-day (red) moving averages, though it has managed to climb back above the latter.

Source: TradeStation

Whole Foods is the much larger company, generating $15.86 billion in annual revenue vs. Sprouts' $4.18 billion. However, when it comes to selling the products of these respective companies online via Amazon and Walmart, those revenue figures may be irrelevant.

Consider the difficulty that Starbucks (SBUX) is having with customer pickups of online orders. Now imagine much larger orders, such as an entire week of groceries, being placed by a much, much larger customer base, such as Amazon's or Walmart's.

Picking up these orders now becomes a logistical nightmare, and the easiest solution is delivery. In this scenario, the fact that Whole Foods has more locations than Sprouts Farmers Market becomes a moot point. No physical location could handle the crush of humanity that would result from the overwhelming number of pickup orders.

While Sprouts Farmers Market presents a much cheaper option for Walmart, there is another alternative. Maybe Walmart doesn't need to buy any company. Remember, Walmart already sells groceries. It simply could add more organics to its mix and duplicate whatever delivery system Amazon employs.

Let Amazon blaze the trail, and simply follow the path.

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At the time of publication, Ponsi was long WMT.

TAGS: Investing | U.S. Equity | Consumer Staples | Technology | Consumer Discretionary | How-to | Mergers and Acquisitions | Stocks

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