United Natural Foods has had an impressive run over the past six months as its shares have beaten the S&P 500 by 6.2%. The stock now trades at $46.74, marking a 11.3% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy United Natural Foods, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think United Natural Foods Will Underperform?
We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons there are better opportunities than 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 experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, United Natural Foods grew its sales at a sluggish 1.8% compounded annual growth rate. 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 29.3% annually over the last three years while its revenue grew by 1.8%. This tells us the company became less profitable on a per-share basis as it expanded.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
United Natural Foods’s $3.24 billion of debt exceeds the $52 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $619 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
We see the value of companies helping consumers, but in the case of United Natural Foods, we’re out. With its shares beating the market recently, the stock trades at 16.4× forward P/E (or $46.74 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at the Amazon and PayPal of Latin America.
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