United Natural Foods Inc. Joins in the Organic Sector's Spring Slump

Is this a buying opportunity or a potential value trap?

Jun 12, 2014 at 4:00PM

Screen Shot

Source: United Natural Foods.

With United Natural Foods (NASDAQ:UNFI) reporting earnings earlier this week, the final chapter of what was definitely a forgettable earnings season came to an end for the organic/natural food industry.

While the broader market is up over 5% so far this year, the same can't be said for this industry, which is led by the likes of United Natural Foods and its top customer, Whole Foods Market (NASDAQ:WFM).

WFM Chart

WFM data by YCharts.

Part of this slump has to do with sky-high valuations leading into 2014 -- but some of it has to do with real problems within the sector. Read on to see if United Foods' slumping stock should be avoided, or if it represents a good buying opportunity.

A tiny niche no more
One would think that being the first mover in what started as a tiny niche -- but is now a major burgeoning industry -- would be viewed as a huge advantage. But that simply hasn't been the case for the country's organic leaders.

Whole Foods Market turned in earnings last month that disappointed investors. While some of that disappointment was due to lower-than-expected same-store sales -- which, incidentally, Whole Foods deserves a lot of credit for not blaming on the awful winter weather -- a bigger part of it has to do with larger players entering the organic space.

As these players enter, the thinking goes, the prices for organic goods will come down, and the margins enjoyed by the likes of Whole Foods will eventually contract as well. That line of thinking -- more than anything else -- is what led Whole Foods from being a company that traded for 44 times earnings in November to one that trades for 28 times earnings today.

The same relative dynamics are playing a role in United Natural Foods' stock decline so far this year. In January, it traded for 33 times earnings, whereas now, it trades for 26 times earnings -- a 20% contraction. Whole Foods, it's worth mentioning, is United Natural's single largest customer -- accounting for a whopping 36% of all revenues.

What does it mean for investors?
Though the company continues to post impressive revenue and earnings growth -- roughly 14% each -- investors are starting to worry about the competition such success can bring on. If Whole Foods is in trouble, then that naturally filters down to United Natural.

The biggest disappointment Wall Street likely had with the latest report was a narrowing of guidance to expected revenue and earnings growth of 13.5% and 14%, respectively. Simply put, sometimes, it's hard to satisfy Wall Street's expectations.

But what we are left with is a growing company that is building out its distribution network for a growing industry. The biggest players in this industry -- especially Sysco, which recently announced a proposed merger with US Foods -- get the overwhelming bulk of revenue from restaurants. But restaurants aren't showing anywhere near the kind of sustained strength that organic grocers are.

Of course, this could mean that Sysco would try to take some of United Natural's market share, but that's unlikely given the company's desire to achieve synergies in the restaurant business through its merger with US Foods.

As it stands now, one-third of United Natural's business comes from small, independent, natural/organic grocers like this one located just down the street from where I live in small-town Wisconsin -- outside of which I routinely see United Natural's trucks.


Source: Author.

These are the entrepreneurs that are pushing this food movement forward and will either grow to be stalwarts within their communities or get bought out by bigger players.

By aligning itself early on with such companies, United Natural is positioning itself for long-term relevance within the industry -- no matter which grocer ends up being the dominant player. With the stock trading now at just 23 times expected earnings, that's enough to convince me it's worth making an outperform call on the company for my CAPS profile.

Leaked: A huge small-cap opportunity
This smart device -- kept secret until now -- could mark a new revolution in smart tech (with big implications for health care). It's a gigantic market opportunity -- ABI Research predicts 485 million of its type will be sold per year. To learn about the small-cap stock making this device possible -- the stock that could mint millionaires left and right when its full market potential is realized -- click here.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Brian Stoffel owns shares of Whole Foods Market. The Motley Fool recommends Sysco and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information