What a fantastic six months it’s been for United Natural Foods. Shares of the company have skyrocketed 62.6%, hitting $40.73. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy United Natural Foods, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think United Natural Foods Will Underperform?
We’re glad investors have benefited from the price increase, but we don't have much confidence in United Natural Foods. Here are three reasons we avoid UNFI and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, United Natural Foods’s sales grew at a sluggish 2.5% compounded annual growth rate over the last three years. This fell short of our benchmarks.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for United Natural Foods, its EPS declined by 37.9% annually over the last three years while its revenue grew by 2.5%. This tells us the company became less profitable on a per-share basis as it expanded.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
United Natural Foods’s $3.47 billion of debt exceeds the $38 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $585 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. United Natural Foods could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope United Natural Foods can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
United Natural Foods falls short of our quality standards. Following the recent rally, the stock trades at 17.8× forward P/E (or $40.73 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of United Natural Foods
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