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Why United Natural Foods Stock Just Dropped

By Rich Smith - Jan 28, 2021 at 3:38PM

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When will the pandemic end? United Natural Foods' fate may depend on your answer.

What happened

Analysts are dueling over the future of food distributor United Natural Foods (UNFI 0.91%), which has seen two analyst downgrades on no particular news in less than 24 hours -- but also a third analyst raising its price target.

Amid all the commotion, shares of United Natural Foods stock are down 7.6% in 3:50 p.m. EST trading.

Red stock market arrow goes down across a field of $100 bills

Image source: Getty Images.

So what

The debate over United Natural Foods stock began yesterday morning when TheFly.com reported that Wells Fargo had cited an "unappealing" valuation and an unattractive outlook as reasons for cutting its rating on the stock to underweight (i.e., sell).

Wells Fargo reasons that the pandemic won't last forever, and there's pent-up demand for eating out among consumers. Once restaurants reopen for indoor dining (sometime in the summer, surmises Wells), consumers will begin shifting their discretionary spending from grocery stores (United Natural Foods' primary customers) to restaurants instead. Hence the downgrade.

This morning saw that downgrade echoed by analysts at Northcoast Research (albeit they cut the stock only to neutral). Complicating matters further, though, analysts at MKM Partners, which maintains a buy rating on the stock, upped their price target on United Natural Foods shares to $36 a share.

Now what

That last rating not only contradicts the sentiments of two other analysts, but it implies that far from being something you should sell, you should perhaps consider buying United Natural Foods stock -- before it shoots up 30% in a year!

So what's MKM's reason for contradicting its peers? Diametrically opposed to Wells Fargo's thesis, MKM believes that the COVID-19 pandemic is not going away anytime soon, and the longer the pandemic persists, the longer United Natural Foods stock can be depended upon to generate abnormally strong free cash flow.

In that regard, it's worth pointing out that over the past year, United Natural Foods has generated $365 million worth of cash profits, which is more than three times its reported net income. But here's the thing you should perhaps be most concerned about: Even if economic conditions were such to permit United Natural Foods to keep on generating that much cash indefinitely, with roughly $3.9 billion in net debt on its balance sheet, it would take the company more than a decade to pay off all its debts.

Even if that fact isn't enough to convince you to sell United Natural Foods, it's definitely something to consider before buying.

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Stocks Mentioned

United Natural Foods, Inc. Stock Quote
United Natural Foods, Inc.
UNFI
$39.73 (0.91%) $0.36

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