United Natural Foods
United Natural Foods is the leading distributor of natural and organic foods in the United States. The company services more than 18,000 retail outlets, and its two largest customers are "super-natural" food chains Wild Oats Markets
The company also services a large number of independent and small chain health food stores, and it distributes its wares to traditional supermarket operators, such as Publix, Wegman's, and Stop & Shop. Last year, it began to make inroads into the larger, conventional foodservice distribution business by establishing relationships with giant foodservice operators such as Sodexho Alliance
I've never been a huge fan of the food distribution business. It's a high-volume, low-margin enterprise where low-cost operators prevail. Most companies find it hard to develop a sustainable competitive advantage, and there's a lot that can go wrong. A good example is Fleming Company's demise a few years ago when its largest customer, Kmart, pulled the plug on the relationship. Kmart accounted for more than 40% of Fleming's business, and the company couldn't recover. In short order, it imploded.
But with Berkshire Hathaway's purchase of the McLane distribution arm from Wal-Mart in 2003, perhaps I should change my tune. McLane was a captive distribution company for Wal-Mart, specializing in candy and tobacco. If Warren Buffett is happy owning this type of business, perhaps there's more of a future in it than I thought.
United Natural Foods and McLane share a lot of the same characteristics. United Natural Foods specializes in a specific, growing niche and has important relationships with a supplier base of more than 5,000. Its contract with Whole Foods runs through January 2008, and last June it signed a deal with Wild Oats that runs until 2009. Its primary competitor is Tree of Life Distribution, although it competes regionally with over 250 smaller distributors of specialty foods.
The company generated a 1.9% net margin last year. That's up from 1.5% the prior year, and stronger than Performance Food Group's
United Natural Foods has a solid place in a growing industry. We're seeing an expanding selection of natural and organic food products across the entire grocery industry, a result of increased consumer demand. With double-digit sales growth expected this year for Wild Oats and Whole Foods, the company has solid growth prospects.
United Natural Foods sports a trailing 12-month P/E of 35 and a five-year expected PEG ratio of 1.5 (this means the P/E ratio is 50% higher than the company's expected growth rate), so you have to figure the growth is already priced into the stock. But for investors who believe the health food trend will continue, United Natural Foods is a solid company that should be able to capitalize on that growth.
Find more news for your heart-healthy diet:
- W.D. Crotty was waiting for a pullback in the share price.
- Profits can be gluten-free.
- Whole Foods reaches for the stars.
- Wild Oats offers excuses.
Fool contributor Timothy M. Otte knows good granola when he sees it. He welcomes comments on his articles, and owns shares of Wal-Mart, but none of the other companies mentioned in this article. The Fool has a strict disclosure policy.