This Company Deserves a Closer Look

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Oct 16, 2014

The natural food industry is in an uptrend over the last few years. This is mainly because people want to have more healthy food and avoid having packaged food, which is harmful to health. Even the traditional supermarkets have also moved into this industry because of its increased attractiveness and growing popularity. However, the existing players who already have a strong foothold in this area are having windfall gains.

An apt example here is that of United Natural Foods (UNFI, Financial), a natural and organic food provider. This company reported great fourth quarter results, which beat the Street’s estimates. Also, it led to a sharp rise in its share price.

Snapshot of the numbers

Driven by increased demand for healthy food, revenue surged 7.4% to $1.76 billion, over last year’s quarter. This is higher than the analysts’ estimate of $1.73 billion. The company is a key distributor of Whole Foods Market (WFM, Financial). Therefore, Whole Foods’ success has been instrumental in driving United Natural’s growth. More demand at Whole Foods has led to more success for the United Natural Foods.

Also, the bottom line stood at $0.67 per share and was higher than $0.65 per share in the last year. Analysts were looking for a flat bottom line at $0.65 per share. This shows the food company’s efficiency in managing its costs. However, gross margin took a hit as it dropped to 16.4% from 17.3% in the year ago quarter. This was mainly because of a change in product mix and a weak Canadian dollar, which adversely affected margins.

Strategy to grow

The organic food company has taken the help of Tony’s Fine Foods to grow in the future. Tony’s Fine Foods was acquired by United Natural in July 2014 for $195 million. This buyout will help the company in expanding its presence in the western U.S. Also, it will further help in expanding its product portfolio to items such as baked food, deli and cheeses.

Another acquisition was made last year. United Natural acquired Trudeau Foods in September last year in order to expand the existing basket of organic and natural products. Trudeau Foods added 600 locations to the acquirer’s network and added some private label brands. Thus, these two acquisitions should help the company expand its business.

Valuation numbers

Currently, United Natural Foods’ trailing P/E is at 26.41, which is higher than the industry average of 22.10, which makes the food company unattractive at this point. However, a forward P/E of 19.39 indicates that it is expected to earn more in the future, which makes it attractive. Moreover, it is expected to grow at the rate of 15.44% in the next five years.

The organic food company also provided a bright outlook, wherein it expects revenue to be in the range of $8.13 billion to $8.38 billion for the fiscal year. Also, earnings are expected to be between $2.88 per share and $3.01 per share. This outlook was much better than what analysts were looking for.

Winding up

United Natural Foods is headed in the right direction, as indicated by its blockbuster quarter and a bright outlook for the year. Further, it is expected to provide higher earnings in the future, especially with the two new additions to the business. With all these things working together to attain growth, United Natural looks like a company to be owned for the long run.