UNFI Analysis: Using Value-Investing Techniques
Company description provided from Yahoo.com: “United Natural Foods, Inc. is in the business of distribution and retail sales of natural, organic, and specialty foods and non-food products in the United States and Canada. UNFI offers grocery and general merchandise, produce, perishables and frozen foods, nutritional supplements and sports nutrition, bulk and foodservice products, and personal care products. It is also involved in importing, roasting, packaging, and distribution of nuts, dried fruit, seeds, trail mixes, granola, natural and organic snack items, and confections. In addition, the company offers Blue Marble Brands products on wholesale basis through third-party distributors in organic, natural, and specialty food brands, as well as directly to retailers. Further, it provides Field Day brand products primarily to customers in its independent natural products retailer channel. The company serves independently owned natural products retailers, supernatural chains, conventional supermarkets, and mass market chains, as well as foodservice and international customers outside Canada. It operates 13 natural products retail stores primarily in Florida. The company was founded in 1976 and is headquartered in Providence, Rhode Island” (Yahoo! Finance).
United Natural Foods, Inc (UNFI) is believed to be a company of adequate value. By observing strict qualitative and quantitative factors of UNFI, an investor should come to the conclusion that the company is financially competent, stable, and secure. First, investors must observe the stability of the company during an economically depressed era. To begin my analysis, I prefer to start with the company’s 10K and other SEC Filings during a time of economic downturn. For this analysis, I turned to the most recent catastrophe: the 2008 financial crisis. Investors must do this before selecting a security, because it can provide sufficient information pertaining to the company’s longstanding value. The income statements from UNFI’s 2008 10K and 2009 10K revealed something interesting. The company appears to have demonstrated financial stability by completing an increase in gross profit for the fiscal years of 2008 and 2009. UNFI was also able to to decrease their total amount of debt for both years as well. On another note, UNFI did not attempt to boost sales or profit by selling extraordinary or nonrecurring items and capital. The prosperity was due to the company’s regular business operation. Observing how crowd sentiment affects market price, an investor may have thought UNFI was unstable due to the market price of the security during both of these years. During the period of February 1st, 2008 through June 1st, 2009, UNFI remained far below book value. This would have served as an excellent time to invest into UNFI, but since investors were not speculating, many lost out on plenty of money. Also note, from December 1st, 2011 through March 1st, 2015, UNFI’s market price remained far above its book value per share, and this would not be a reasonable time to purchase shares, because their was a lack of “margin of safety”. The company was extremely undervalued when it was trading for $16-$24 a share, and is still a safe purchase around $35. Market price will very rarely represent each security’s true value, so you must differentiate between market value and book value during a time of economic troughs. UNFI passes the first test of the analysis, because of sustaining true financial competency during a time of global economic collapse.
Next, I will pay attention toward UNFI’s competition. I do not waste much time on the competition aspect, but it is wise to at least check the competitions’ current financial positions. AMCON Distributing Company (DIT), a company which offers wholesale and retail distribution of cigarettes, tobacco, candy, beverages, groceries, paper products, health and beauty care, frozen and chilled products, and institutional food service products. Some of these items are listed as natural, organic, and speciality products. DIT appears to financially competent, as it’s clean record is justified by passing 7 of Benjamin Graham’s strict quantitative test. The company passes the test of being in a defensive sector (no technology or financial companies are allowed), sales were greater than $340 million ($1,297.4 million), the current ratio is greater than or equal to 2 (3.6), long-term debt is less than assets (Long-Term Debt: $340 million, Assets: $66.5 million), five year EPS growth rate was 368.7% (we will look at this in a second adding the sales of non recurring items), a P/E ratio of 15 or less (9.75), price/book ratio times P/E cannot be greater than 22. Since DIT has a a book ratio of 0.84, then we can observe the formula in practice (.84X9.75=8.19<22). DIT however lost credibility by realistically having an EPS 5 year growth rate of -9.10% after deducting for the sales of non recurring items. UNFI’s actual EPS rate was not affected in the same way. Looking at DIT’s 13 year EPS rate compared to UNFI’s, DIT posted a 13 year EPS growth rate of 88.20%, the lowest rate was -38.40%, and a median rate of -2.70%. UNFI’s 13 year growth rate of 30.90% came in behind by a substantial margin, but more important, the company presented itself as more stable. UNFI’s lowest EPS rate was -1.40% and its median was 11.95%. Also note that Amcon had less sales and a greater assets/debt ratio than UNFI. I believe that UNFI will uphold value much longer than DIT, and the are in a much better position due to its greater size in sales and assets.
The next company who I will compare value to is Coffee Holding Co., Inc., which has lacked positive EPS growth for the last five years and it also fails too many of Benjamin Graham’s quantitative tests to pose much of a financial threat to UNFI.
Onto the next competitor’s 13 year EPS rates, Core-Mark Holding Co Inc (CORE) presented a growth rate of 45.60% and median rate of 8.55%. The company however posted an EPS low of -30.20%. Such a low percentage makes CORE less stable than UNFI’s low of only -1.40%. Also CORE lacks the quantitative aspects of UNFI. The next competitor’s value I will compare is Crystal Rock Holdings (CRVP). CRVP’s long-term debt is more than its net current assets. This possibly suggests that a company is highly leveraged and an unstable investment. CRVP’s long-term debt is $18.9 million, while its assets are $8.9 million, while UNFI’s long-term debt is $444.7 million, while the company’s net current assets are $995.4 million. This demonstrates UNFI’s wise ability of using debt, without becoming too leveraged.
Sysco Corporation (SYY) is the last competitor we will observe. Sysco corporation is another example of instability due to poor use of leverage. SYY’s long-term debt is $4,274.9 million, while its net current assets are $2,848.0 million. This highlights that SYY has not obtained and passed this strict quantitative test of financial solidity. UNFI appears to have a more stable financial position than its rivals. The persistent growing EPS rate and proper use of leverage should make the investor feel confident in the company and its ability to achieve success in areas where other companies appear to be incompetent.
Now we will address UNFI’s qualitative factors that coherently affects business operations: market share and management. Market share will mostly be focused on the industry of organic wholesale foods. Currently, UNFI has the greatest market share in the business of organic and natural wholesale. Having a substantial market share is essential, especially when a company reveals well-established financial ability such as UNFI. This allows UNFI to continually have a competitive advantage and to continue dominance in a growing market. Organic products will continue growing as more and more scientific studies demonstrate the longevity and bodily wholeness of healthy eating. Let us not speculate too much on the growth of any market, but let us discuss what is true, organic food products appear to be here to stay.
The evidence provided suggests that UNFI is a good fit for the value-investor. The only case that can be brought against UNFI is its lack of a dividend and the short-term negative sentiments from a current negative EPS. However, not having a dividend will allow UNFI to increase its free cash flow and expand their business operations and working capital in the growing market of organic wholesale. Quality companies who can substantiate free cash flow and stable dividends are often dominate in mature markets or industries. Do not let UNFI’s dividend policy shy you away from finding sufficient value in this security. The company’s value is justifiable if and only if it is bought with a rational margin of safety, therefore long-term capital appreciation and preservation should advance. I personally observe this company as a buy anywhere around or below $35 and a hold if already purchased at a level near this. UNFI has financially positioned itself for lasting success. Even without a dividend, investors should have very little fear with some portfolio dependence on UNFI’s common stock.