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Sprouts is the only 'likely takeout candidate' left among grocers, JPMorgan says

  • In the wake of Amazon announcing plans to acquire Whole Foods, many grocers have watched their stocks take a beating.
  • Shares of Kroger and Supervalu have tanked more than 15 percent, each, over the past three months.
  • Sprouts' stock is actually up about 3.3 percent over the past three months.
  • "We think SFM is in a good position... to defend itself," JPMorgan said in a note to clients, upgrading the stock.
An employee stocks cherries at Sprouts Farmers Market in Wheat Ridge, Colorado.
Anya Semenoff | The Denver Post | Getty Images
An employee stocks cherries at Sprouts Farmers Market in Wheat Ridge, Colorado.

Sprouts Farmers Market is the "most likely" takeover candidate left among publicly traded grocery chains, JPMorgan has predicted, upgrading the stock on Friday to overweight from neutral.

Following Amazon going after Whole Foods, JPMorgan analyst Ken Goldman wrote in a note to clients that — should anyone else be shopping for a deal — "Sprouts is large enough to move the needle for most large retailers but not so large as to generate huge integration or balance sheet risk."

Though, a takeout of Sprouts would make more sense for a strategic acquirer, like Target, than a financial one, Goldman added.

Sprouts' business model is different than most grocery chains today and isn't easy to copy, which gives it another leg up for the company in the supermarket space, JPMorgan's Goldman said. The grocer has relationships with farmers and is able to buy their excess produce at below-market prices and move it quickly into its stores.

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

Since the Whole Foods deal, many grocers have watched their stocks take a beating. Shares of Kroger and Supervalu have tanked more than 15 percent, each, over the past three months. The merger was made public in mid-June.

Meantime, Sprouts' stock is actually up about 3.3 percent over the past three months. Shares have climbed an impressive 24 percent since the start of the year — impressive especially when compared to the grocer's peers.

"Many of the issues SFM has faced over the past year — deflation, heightened labor investments, and abnormally intense competition — are beginning to abate," Goldman said on Friday.

To be sure, risks do remain for Sprouts, and Amazon is one of them.

Amazon Prime Now has been providing e-commerce services for 10 of Sprouts' stores, with plans to double that number in 2017 and expand the partnership further in 2018.

"Though still expanding today, Amazon could terminate or, at the least, de-emphasize its relationship with Sprouts once its acquisition of Whole Foods closes," Goldman warned on Friday.

Representatives from Sprouts and Amazon didn't immediately respond to CNBC's requests for comment.

Regardless, the grocery landscape space is becoming more and more competitive by the week — some might say by the day. German-based grocer Aldi is opening up stores throughout the U.S., supermarket companies are struggling to find a footing online, and meal-kit businesses present another question — ignore, or give in and compete?

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