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J.P. Morgan: Sprouts would make attractive acquisition target

As Amazon.com Inc. prepares to buy Whole Foods Market Inc., another organic grocer may be ripe for an acquisition.

Although many food retailers are struggling, Ken Goldman, an analyst with J.P. Morgan North America Equity Research, pointed to Sprouts Farmers Market Inc. as "the most likely takeout candidate left in the grocery space" in a research note published Aug. 4. Goldman raised his price target for the company's stock to $27 from $24 and upgraded its shares to "overweight" from neutral.

As all food retailers continue to cope with competition, deflation and other factors, Goldman said there are multiple reasons why Sprouts could make an attractive acquisition target for a larger retailer, such as Target Corp.

On one front, the company's roughly $4.5 billion in sales over the last 12 months and its network of 279 stores make the chain "large enough to move the needle for most large retailers but not so large as to generate huge integration or balance sheet risk," Goldman wrote.

On another front, Sprouts utilizes a supply chain that would be difficult for other companies to replicate. The Phoenix-based grocer's model focuses on purchasing excess produce directly from farmers, a strategy that keeps down the prices customers pay.

Additionally, a larger retailer bidding for the company would not have to win approval from a nonshareholder group within the company, Goldman said. That differentiates the company from rivals such as privately held Publix Super Markets Inc., for instance, which is employee-owned and would require employees to approve any acquisition bid.

On the earnings front, Goldman noted that Sprouts has not lowered its guidance in nearly a year and that the company may be taking a more conservative tone as it estimates future performance.

Those factors make Sprouts a bright spot relative to its competitors, Goldman wrote.

"We continue to think that, overall, grocers are going to face challenging times ahead, mainly because competition continues to intensify," he said. "But we think [Sprouts] is in a good position — as a premium grocer with a unique business model — to defend itself to a degree."

Shares of the organic grocer are up 25.9% so far in 2017, better than other publicly traded grocers such as Kroger Co., according to S&P Capital IQ.