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United Natural Foods (NYSE: UNFI) is Risky… But the Reward is Worth It

Thursday, August 6, 2020 | Nick Vasco
United Natural Foods (NYSE: UNFI) is Risky… But the Reward is Worth ItUnited Natural Foods (NYSE: UNFI), a grocery distributor, has roughly tripled from February levels; it is one of several grocery companies that have benefited from pandemic-related pantry loading.

While UNFI has slowly drifted upwards over the past two months or so, it had an extremely rocky May and June.

In early May, shares doubled in just four sessions on expectations of a pandemic-related boost in results. Q3 2020 earnings, which is the quarter ending May 2, 2020 for UNFI, were released on June 10. The numbers blew away consensus estimates… But shares plunged from around $23 to less than $15 in the following two trading sessions.

At first glance, this move can seem shocking; but it proves that what really matters is the expectations that are baked into the share price.

What Happened in Q3 2020?

Revenue growth for Q3 came in at around $6.7 billion, up 12% yoy. Adjusted EBITDA was $222 million, up 32% yoy.

Double-digit revenue growth is nice, but investors were expecting more due to pandemic-related tailwinds.

But on the earnings call, CEO Steven L. Spinner spoke about headwinds faced by the company:

“Our 12% sales growth in the third quarter includes the impact of headwinds from lower inbound fill rates as suppliers across multiple product categories were unable to meet the significant increase in demand in the quarter. And while we do expect fill rates to gradually improve as we move through the fourth quarter, we do not expect them to return to pre-COVID levels until fiscal 2021.”

While United Natural Foods is taking steps to remedy these issues, it seems the company won’t be able to take full advantage of pandemic-related increases in demand.

That said, some of the increase in grocery demand will likely stick. Work-from-home looks like a trend that is here to stay as many companies have realized they can conduct a high percentage of their operations remotely. And working from home leads to cooking at home. A recent survey by Piper Sandler found that around two-thirds of respondents intend to cook more at home post-pandemic, with the average person estimating they would cook more than four additional meals per week.

United Natural Foods Attractive P/E Ratio with Low Margins

United Natural Foods is trading at around 8x projected 2020 earnings and around 10x projected 2021 earnings.

But UNFI is trading at just .05x projected 2020 sales and .04x projected 2021 sales.

 The company has razor-thin margins, with an EBITDA margin of around 3% and net profit margin of roughly 0.5%.

UNFI’s margins reflect the ultra-competitive nature of the grocery industry.

Looking at it glass half-full: if UNFI can increase margins even a little bit, shares would be an incredible value.

But glass half-empty: if costs increase even slightly, the company could soon face bankruptcy.

Where Does That Leave You?

United Natural Foods is a risky investment – there’s no way around that.

But even though shares shouldn’t be trading at a 25-30x multiple, they are too cheap at current levels.

You certainly shouldn’t make a large investment in UNFI, but this stock has the ability to become a multi-bagger. If you put a small percentage of your portfolio into UNFI, you could potentially get a huge payoff in the next few years.

Where Can You Get In?

UNFI is currently near 52 week-highs, but trading at around 25% of all-time highs set in 2015.

United Natural Foods (NYSE: UNFI) is Risky… But the Reward is Worth It

I wouldn’t be too concerned about the long-term resistance, but would like to see shares break above the $23-24 range before getting in.

There hasn’t been a lot of conviction in UNFI’s price action since the post-earnings low. It’s just been a slow and listless climb to the low $20s.

Ideally, shares will get closer to the $23-24 range, consolidate for 5-10 sessions at that level, and then decisively breakout above $24.

The Final Word

UNFI could either 5x or lose 80% of its value over the next three years.

I think the former has a better chance of happening than the latter, but it’s still a risky investment.

If you do get in, invest what you can afford to lose and/or place a tight stop-order to limit your downside.

 

 

 

Companies Mentioned in This Article

CompanyBeat the Market™ RankCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
United Natural Foods (UNFI)1.0$17.74+2.1%N/A-3.05Hold$18.33
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8 Stocks That Robinhood Investors Got Right

The online investing app Robinhood has been a clear pandemic winner. As more Americans were forced to work from home, many made the decision to begin testing their investing skills by trading stocks. Robinhood appeals to millennial and/or novice investors for several reasons. First, the app makes it fun. You might say it “gamefies” stock trading. With commission-free trades, investors have an incentive to trade frequently. And many users of the app do just that.

The second reason is that it allows investors to buy partial (or fractional) shares. Although Robinhood is often associated with penny stocks, the app lets investors buy shares of “pricey” stocks like Tesla (NASDAQ:TSLA) without having to pay for a full share right away.

And data shows that Robinhood investors have a healthier risk appetite than other investors. And that appetite has increased since the start of the pandemic. This lines up to the time when investors had more time on their hands.

With that said, many Robinhood investors have been, quite frankly, using the app to engage in a legal form of gambling. I say this because trying to dive quickly in and out of the market in an attempt to capture a profit may work. But historically, it’s a path to ruin.

However there are two sides to every story. And the same is true of Robinhood investors. There are many examples of where these investors have gotten it right. In this presentation, we’ll show you eight examples of stocks that the market and Robinhood investors have gotten exactly right.

View the "8 Stocks That Robinhood Investors Got Right".

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