United Natural Foods: Healthy Eating, Healthy Stock?

Even though I do occasionally shop at Whole Foods (NASDAQ:WFMI), I'm not exactly what you'd call a loyal consumer of natural or organic foods. I take vitamins if I remember to, I don't really care if there are hormones in my beef, and I'd rather eat sawdust than "super-grains" like quinoa. But that doesn't mean I don't appreciate the opportunity in front of United Natural Foods (NASDAQ:UNFI) -- the country's largest distributor of natural foods.

Sales in the company's fiscal fourth quarter were up almost 22% as reported. Margins took a slight shave in the quarter, though, and pre-tax profits rose 17% for the quarter. Due to a better tax rate, the company posted nearly 22% growth in reported net income for the period.

Looking at the full year, the company posted a good increase in operating cash flow -- producing more than $38 million this year vs. about $9 million last year. Unfortunately, the company still wasn't able to post positive free cash flow as capital expenditures nearly tripled from last year to almost $66 million.

Cash flow aside, I really like where this company sits. Whole Foods has been a loyal customer for many years (and is contractually bound to be so for at least another two years), and Wild Oats (NASDAQ:OATS) came back to United Natural after a brief dalliance with a rival. Further, I would think that United Natural at least has the potential to become a more significant supplier into the regular supermarket industry as those companies add more natural foods to their shelves.

What's more, while United Natural is doing alright, I think it can do even better. Looking at the cash conversion cycle, United Natural has a ways to go to catch up with SYSCO (NYSE:SYY) -- arguably the best food distributor in the biz. For the most recent quarter, United Natural posted a cycle of about 47 days, while SYSCO came in at a strong 21 days. In looking at margins, while the two companies are close on gross margins, SYSCO does much better on an operating basis. I don't view these so much as red marks against United Natural, but rather as a goal that the company might someday aspire to reach.

Valuation is problematic here. You can't look at enterprise value-to-free cash flow because there is no FCF. On a P/E basis, the stock seems expensive at about 34 times trailing earnings, and the PEG (P/E to growth) doesn't help much either -- the PEG looks high at 1.8, versus 1.5 for the S&P 500. Still, I think you can make an argument that United Natural could be a "game changer" and, thus, not necessarily an ideal stock to evaluate by one-size-fits-all metrics.

I won't be buying these shares myself, but I do believe that the market for natural/organic foods will continue to grow and that United Natural has a very real opportunity to grow with it.

For more all-natural Foolishness on this stock:

• United Natural Foods on the Go
• Overpriced Natural Foods
• Healthy News at United Natural Foods
• Gluten-Free Profits

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).