Overpriced Natural Foods

A year ago, I wrote that food distributor United Natural Foods (NASDAQ:UNFI) "looks to be about as healthy as the food it distributes." At the time, the stock was a split-adjusted $24.28 a share. This morning, it was changing hands at $31 and change -- a healthy one-year rise.

The big news back then was that 102 Wild Oats Markets (NASDAQ:OATS) stores were added to the company's customer list. With Wild Oats and Whole Foods Market (NASDAQ:WFMI), United Natural Foods was the dominant supplier to the "supernaturals," as the big-box natural food stores are called.

Yesterday, the company reported that second-quarter net sales shot up 28%, and net income (minus special items) rose 32%. That's great, but earnings missed analyst estimates by $0.01. That cent sent the stock down $3.23 a share, or 10.4%, at the open of NYSE trading, but a brokerage firm upgrade allowed the stock to recover and close at $29.20, down 4.1%. And it's worth noting that yesterday's loss has been fully recovered in today's trading.

Sales were strong by all measures. Even excluding the revenue from Wild Oats Markets and recently acquired Select Nutrition Distributors (SND), sales growth was a healthy 14.5%.

Margins were not quite as strong, as the gross margin dropped 1.1 percentage points to 18.9% and the operating margin decreased a 10th of a point to 3.3%. These are, though, fully reasonable movements given that the company warned in December that the Select Nutrition Distributors acquisition would be "slightly dilutive for the current quarter, neutral to the full year fiscal 2005 earnings per share and accretive thereafter."

Analysts expect earnings to increase 14%, to $1.18 a share, for the year ending July 2006. Given the strong growth expected for natural and organic foods, and the company's recently completed three-year distribution agreement with industry giant Whole Foods Market, long-term prospects should be solid.

At 26.4 times forward earnings, the stock seems premium priced -- just like United Natural Foods' natural and organic foods. In this observer's opinion, investors interested in the stock would be wise to wait for lower prices.

Motley Fool co-founder Tom Gardner has, on two separate occasions, recommended Whole Foods Market to Motley Fool Stock Advisor newsletter subscribers. These positions, subsequently closed, netted readers 64.4% and 67.9% gains -- many times the Standard & Poor's 500's return. Why not consider a risk-free subscription to the Stock Advisor newsletter and review Tom's latest selections?

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.