United Natural Foods: This Large Food Distributor Is Performing Well
United Natural Foods Inc. (NYSE:UNFI) is the largest publicly traded wholesale distributor of health and specialty food in North America. It is Whole Foods Market's main supplier, with Whole Foods making up about 20% of total company revenues in recent years.
The company distributes over 250,000 natural, organic and conventional products to more than 30,000 customers including natural product superstores, independent retailers, traditional supermarket chains, e-commerce retailers and the restaurant industry. The company has over 57 distribution centers and warehouses comprising over 30 million square feet of operating space.
While many other companies are struggling in weak economy and high-inflation period, United Natural Foods is performing surprisingly well. The company has also diversified into traditional food product distribution in recent years. All things considered, I believe the stock to be undervalued at current levels; here's why.
A major acquisition
In 2018, United Natural Foods acquired competitor SUPERVALU for a total transaction value of $2.9 billion. SUPERVALU distributed more traditional products to grocery stores as compared to Uniteds healthier options. This acquisition was financed with debt and left the company in a very leveraged position after the deal closed with leverage ratios exceeding 4. Debt has been reduced since then and the leverage ratio is under 3 currently.
Financial review
The company generated $28.9 billion in revenues in full fiscal year 2022, but the food distribution business is a low margin business and the operating margin was only 1.2%. The company has a current market capitalization of $2.2 billion.
The company reported full fiscal year and fiscal fourth-quarter results for the period ending July 30 on Sept. 27. For the fourth quarter, sales increased 8.0% to $7.3 billion, adjusted Ebitda increased 3.4% to $213 million and adjusted earnings per share increased 1.6% year over year. The bottom-line results were negatively affected by inflation across the board, including increased labor costs and rent inflation.
For the full year, sales increased 7.3% to $28.9 billion, adjusted Ebitda increased 7.7% to $829 million and adjusted EPS increased 15.6% to $4.83. Total debt was reduced by $174 million, which brough the debt leverage ratio down to approximately 2.6.
The CEO stated, Our fourth quarter capped a year of improving operational performance driving strong financial results. Our commitment to delivering higher customer service levels amidst significant industry and economic uncertainty helped us achieve market share gains.
Total liquidity remained strong at $1.7 billion, which was comprised of approximately $44 million in cash and $1.6 billion in availability under the companys asset-backed lending facility.
Guidance and valuation
United Natural Foods provided updated guidance for the full fiscal year ending July 2023 in its earnings release. Sales are expected to be approximately $30 billion, adjusted Ebitda is expected in the range of $850 to $800 million and adjusted EPS in the range of $4.85 to $5.15.
Consensus analyst EPS estimates for the fiscal year ending July 2023 are $5.08, which puts the company selling at a forward price-earnings ratio of just 7. The forward enterprise-value-to-Ebitda ratio based on the company's own estimates is approximately 7.5.
When using $4.83 as the starting point for earnings per share and projecting a 5.0% long-term growth rate, the GuruFocus discounted cash flow calculator provides a fair value of $51 per share for the stock, which is below the current share price of around $37.
Guru trades
Gurus who have purchased United Natural Foods stock recently include Joel Greenblatt (Trades, Portfolio) and Steven Scruggs (Trades, Portfolio). Gurus who have reduced or sold out of their positions include Barrow, Hanley, Mewhinney & Strauss and Mario Gabelli (Trades, Portfolio).
Conclusion
United Natural Foods appears to be successfully managing this inflationary environment and creating meaningful earnings and cash flow growth. Any reduction in total debt should create value for equity shareholders going forward, though the debt could weight on the company with rising interest rates. Although the company doesnt pay a dividend currently, I believe the low valuation levels and growth potential make up for it.
This article first appeared on GuruFocus.
