Why You Need to Watch These 3 Organic Food Industry Players

United Natural Foods (NASDAQ: UNFI  ) has been delivering good results on the back of strong demand for its natural, organic, and specialty foods as well as non-food products in the United States and Canada. Year to date, shares have gained approximately 27% and more upside could be in store in the future.

Organic opportunity
As people become more and more health conscious, sales of natural and organic food and personal-care products are picking up. This is the reason why the likes of Whole Foods Market (NASDAQ: WFM  ) and Hain Celestial (NASDAQ: HAIN  ) have done very well in recent times.

The global organic-food market is slated to grow at an estimated compound annual growth rate of 12.9% to $105 billion in 2015. The North American market is estimated to grow at a CAGR of 12% from 2010 to 2015. The global demand for organic personal-care products in 2012 was $7.6 billion and this is expected to reach $13.2 billion by 2018, growing at a CAGR of 9.6% from 2012 to 2018.

The market size for natural and organic products is quite substantial and all three companies have done pretty well in the last three years.

UNFI Revenue TTM Chart

United Natural Foods revenue trailing-12 months data by YCharts

Also, the three companies discussed here have also done well despite weak consumer spending and unstable consumer confidence. The main reason behind this is that these companies cater to the more affluent section of society, which isn't affected much by the tough and uncertain economic conditions that have prevailed post recession.

Robust performance
United Natural Foods witnessed a revenue jump of 22.2% year over year to $1.6 billion in the fourth quarter. This growth was primarily driven by strong demand in the natural- and organic-food segment and also an additional week in the quarter. The company reported earnings of $0.65 per share.

Going forward, its prospects look good because of the opportunity in the organic food and non-food markets. Management is also optimistic about the industry's prospects and expects the natural-organic market to double by 2020. The company is positioned to gain more market share by supplying items to supermarkets and independent sellers.

These two are following different strategies
Hain Celestial has been in an aggressive acquisition mode as it looks to grow at a rapid pace in the organic- and natural-food market.

Through its acquisition of Premier Foods last year, Hain quickly positioned itself in the top 40 food and beverage suppliers in the UK. Last December, it acquired the BluePrint Juice brand, which is sold at a number of national, natural, and gourmet retailers. In May, it purchased Ella's Kitchen Group, a maker of organic baby food with 80 products offered in the United Kingdom, United States, and Scandinavia.

Sales of organic food in the United States increased from approximately $1 billion in 1990 to $11 billion in 2004 and $27 billion in 2012. This trend is expected to continue at a decent pace going forward, as mentioned earlier, and Hain is positioning itself to capture a big share of the market through acquisitions.

Meanwhile, Whole Foods Market is trying to shed its image of serving the rich. It has announced plans for an 18,000 square foott store in Englewood, one of Chicago's most impoverished neighborhoods. If its low-cost stores manage to do well, one can expect to see many other under-served communities in the rest of the country get Whole Foods stores. It currently has 351 stores spread throughout the United States, Canada, and the U.K.

Whole Foods is also planning to take its store count to 1,000 in the U.S, which would be around three times its current store presence. Thus, it is not surprising that analysts estimate Whole Foods' earnings to grow at a CAGR of 19% over the next five years, while the overall industry's earnings are expected to grow at 15% over the same time frame.

Valuation

Company

Trailing P/E

Forward P/E

Earnings Growth Estimate (Next 5 Years. % p.a.)

United Natural Foods

30.62

23.26

13.15%

Whole Foods Market

40.21

33.71

18.71%

Hain Celestial

32.03

22.46

14.70%

Source: Yahoo! Finance

All three stocks appear expensive on a trailing P/E basis. However, all three companies expect to grow rapidly and that's why the forward P/E comes down substantially. It's important to understand that each company's expected earnings growth over the next five years could increase in the future because of the opportunity in the organic food market.

Conclusion
There is substantial opportunity in the organic-food market and these three companies have done really well so far to capitalize on that. Going forward, their different strategies should help them establish their position further and deliver even greater returns to shareholders.

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