At some point, every investor is faced with a choice and a challenge: Invest in a stock where the story is great and the numbers aren't, or invest in a stock with great-looking numbers but a less intriguing story. That's the case with United Natural Foods
Growth isn't much of a problem these days at United Natural. Sales were up 21% this past quarter, with organic growth of almost 18%. Margin performance was less robust, though, as higher costs ate into the gross and operating margins. On an as-reported basis, both operating income and net income fell from year-ago levels. Still, the company shows year-over-year growth when adjusted for certain items like employment transition costs.
Other metrics were similarly foggy. Free cash flow was negative, inventory growth outpaced sales growth, and the cash conversion cycle slipped a bit from the prior quarter. In addition, the company sports a trailing P/E of roughly 29.
Nonetheless, I can't really speak ill of this company. Not only is it the preeminent distributor of natural foods, but it's keyed into fast-growing chains like Motley Fool Stock Advisor pick Whole Foods
I'm beginning to think there are more and more shoppers like me who patronize Whole Foods not because they care about granola or small organic farmers, but because they like the shopping experience. Greater traffic in these stores means more potential sales for Whole Foods and United Natural alike.
There are certainly some challenges afoot. Investors had to digest the sudden and unexpected departure of the prior CEO in October, and there are aspects of this business with room for improvement. No one expects it to become SYSCO
Sussing out an attractive cash flow-based valuation requires more gymnastics than I'm generally comfortable with, so I can't make any sort of value call on this stock. Nevertheless, in pointing out the risks inherent in what United Natural isn't, let's not lose sight of what it is: a fast-growing distributor leading a growing and attractive market. For investors who can stomach the risks, it might be a very healthy opportunity indeed.
For more all-natural Foolishness:
- Lifeway Gets Milked
- Distractions at Whole Foods
- United Natural Foods: Healthy Eating, Healthy Stock?
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
