Is United Natural Foods Growing Fast Enough?

With natural and organic foods being the hottest area within the edible industry, the $3.7 billion market cap natural food wholesale giant United Natural Foods (UNFI -2.47%) may appear to be a no-brainer. In five years, the stock is up nearly 350%, a very strong but not outrageous climb considering the overall industry growth and the growth of some peers. It trades at roughly 25 times forward expected earnings and recently raised guidance for its bottom line in fiscal 2014, which delighted the market. Still, this is a business that is driven by margins, meaning that while a small increase can send earnings soaring, a small decline can bring a crunch fast. Is United Natural Foods a good play on the delectable natural-food industry?

Tailwinds
According to a report titled the 'United States Organic Food Market Forecast And Opportunities, 2018,' natural and organic food sales CAGR is pegged at 14%. While it's not a sky-high figure, the effect of compound returns does make it a compelling element to the ongoing growth story in natural foods.

For United Natural Foods, this simply means more and more business. The company distributes anything from sports nutrition products to nuts, with some being branded products. It's a densely competitive space but nonetheless appealing considering that more than 80% of Americans are now buying organic goods at least some of the time, with more expected to come. As people become increasingly aware of health- and environmental-related concerns, the industry is in prime position to take market share from conventional food goods.

Considering the tailwinds, it doesn't come as much of a surprise to see United Natural Foods growing sales in the double digits for its recently ended quarter. The company grew net sales more than 12%, excluding the acquisition of Trudeau's distribution business. The bottom line grew nearly 22% to $0.56 per share, driven by a combination of sales growth, acquisitions, and a small boost in operating margin (now sitting at about 3%).

For the current full year, investors can expect sales growth of 10.5%-11.8%, with earnings growth of 12.4%-15.1%.

Worth the price?
United Natural Foods' growth looks sustainable and comfortable. As of last quarter, sales to supermarkets represented about a quarter of the overall sales, while sales to independent food stores represents 32% of the total. Predictably leading is sales to the supernatural segment, representing 37%. All channels are growing in the double digits.

The smallest contributor may be one of the most compelling: food service distribution. This is product sent directly to restaurants and food providers. While only 3% of sales, the segment is growing faster than the rest with 27% year-over-year growth.

On a piece-by-piece basis, and even looking from the top down, United Natural Foods is performing well. At 25 times earnings, it better be. The company doesn't trade at a premium to its peers -- Hain Celestial trades at 26 times, while heavily branded retailer Annie's trades at more than 35 times -- but the segment as a whole is rich.

In a market that only goes up, it becomes more and more important to be conscious of price paid versus value received. United Natural Foods is a strong business with the wind at its back, but 12%-15% earnings growth versus 25 times earnings suggests that the company would need to continue or improve its growth at least through 2018. Natural foods are a tantalizing investment theme, but choose carefully.