Why we think United Natural Foods Inc is a good buy

The focus on eating healthy food - preferably locally sourced and chemical-free - is one of the benefits to come from the still-unfolding pandemic.

Today, many people are making more conscious decisions about the food they eat. Numerous households have started their own home vegetable gardens. Those who don't have the space to produce their own food are frequently deciding to support local food producers.

Whether this focus and interest on eating healthy food will continue or not remains to be seen.

However, one thing is certain. Some companies that offer naturally produced and organic food have seen tremendous growth over the past year.

One of these companies is United Natural Foods (NYSE: UNFI), which describes itself as the largest publicly traded wholesale distributor delivering healthier food options to people throughout the United States and Canada.

What does UNFI do?

From its humble beginnings that started with organic produce being sold out of the back of a Volkswagen van in 1976, UNFI has re-invented and transformed itself through informal joint ventures and partnerships with different companies over the years.

Today, UNFI operates nearly 50 distribution centres across the US and Canada. Its product line has also increased. The company now sells natural and organic as well as conventional groceries, chilled items, specialty, pet and personal care items.

Instead of the dilapidated van, the company's distribution fleet now includes around 2200 trucks that ply different routes across North America.

Healthy financials

When it reported its second-quarter fiscal results (ending January 31, 2021), UNFI showed some impressive numbers including:

• Net sales increase of 7.1% to US$6.89 billion
• Net income of US$59 million, an increase of US$90 million
• Adjusted EBITDA of US$206 million, a 57.3% increase
• Adjusted EPS of US$1.25, a US$1.00 per share increase

In his statement during the announcement of the company's financial results, UNFI Chairman and CEO Steven L. Spinner was quoted as saying: "Our strong second-quarter results demonstrate that UNFI continues to execute at a high level as we again leveraged strong year-over-year sales increases into even stronger bottom-line growth."

According to Spinner, UNFI anticipates that the underlying momentum in the business will continue for the balance of this fiscal year on the back of additional stores.

Based on the company's recent statements, UNFI has also reaffirmed its full-year outlook in terms of EPS and adjusted EBITDA. This outlook assumes that food-at-home consumption remains elevated and exceeds food consumed away from home for the rest of fiscal 2021.

The Amazon connection

Another highlight and a piece of important news for UNFI investors is the company's announcement that it has extended its distribution partnership with Whole Foods Market through to September 2027.

What makes this relevant is the fact that Whole Foods Market is one of the largest supermarket chains in the US focused on natural food. The company claims that its products are free from hydrogenated fats and artificial colours, flavours, and preservatives.

On top of that, Whole Foods Market is owned by Amazon. That means it has one of the widest and strongest distribution networks of any company, which can only be a benefit to UNFI.

Technical analysis of UNFI's share price performance

While initial gains in 2020 lifted the share price from multi-decade lows of less than US$6, momentum was unable to be sustained after pushing into the region of US$23. In the latter part of the year the stock drifted sideways, spending most of its time in a range between US$14 and US$20.

The new year gave the bulls a new lease of life and UNFI was quickly propelled up to the US$40 region. Subsequent consolidation in a range of US$32 to US$38 provides a platform for the stock to launch additional forays above US$40, initially targeting prices around the US$51 level, last seen in December 2017.

Hedge funds and institutional investors buying into UNFI

Given the relatively subdued share price performance in the latter part of 2020, it's interesting to note that some hedge funds and institutional investors have been buying into UNFI over the past few months. A recent investor newsletter reported some topical activities in UNFI shares that showed:

• First Trust Advisors LP increased its stake in UNFI by 119.4% during the first quarter.
• Amundi Pioneer Asset Management Inc. lifted its holdings in UNFI by 170.6% during the first quarter.
• Charles Schwab Investment Management Inc. boosted its stake in UNFI by 3.0% in the third quarter.
• AQR Capital Management LLC grew its holdings in UNFI by 31.8% in the third quarter.

Industry outlook

According to a recent Allied Market Research report on natural food and drinks, this sector is estimated to reach US$191,973 million by 2023, growing at a CAGR of 13.7% from 2017 to 2023.

The report said current consumer behaviour which is more inclined towards health and wellness, safety and social impact, is a major factor in the growing popularity and support for natural food.

The report also mentioned that the rising awareness for healthy food ingredients is expected to deliver a substantial growth opportunity to industry players.

Given the solid foundation of over 40 years of producing organic and natural food, plus a strong connection with Whole Foods Market (and ultimately Amazon) along with a growing consumer preference for healthier food options, UNFI is in a great place to take advantage of more growth in the coming years.

We consider it a buy.

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