I say "back on" here because prior to these recent gains, shares of United Natural -- a leading distributor of organic foods -- were cooling off, down by as much as 11% since the company hit a new 52-week high in October. The valuation (then) was considered hard to digest. But things have changed.
All it took was for Sysco Foods (SYY) to announce a blockbuster $3.5 billion deal for US Foods. Given the rate at which Sysco has been gobbling up the competition, there is now speculation that United Natural, which would immediately expand Sysco's market in organic and natural foods, might be next. But I wouldn't bid up these shares, at least not solely on the basis of M&A speculation.
While Sysco is no stranger to acquisitions (US Foods is one of more than a dozen companies Sysco has picked up this year alone), it very rarely, if ever, overspends. Although United Natural has developed a strong track record of exceptional growth results, it's hard to see the value that Sysco would acquire.
I'm not suggesting that United Natural wouldn't be a "natural fit" to Sysco. But since company generates what amounts to less-than one-seventh of Sysco's annual revenue, I don't immediately see what (if anything) United Natural can offer to Sysco that Sysco couldn't already duplicate on its own, given its massive infrastructure.
Plus, as I've said regarding Annie's (BNNY), a packaged food company that specializes in natural and organic comfort foods, there is no longer a clear delineation between Annie's products and those with lower price tags from the likes of Kraft (KRFT), which has also entered the organic market.
It's true that -- as with Annie's -- United Natural has built a strong name for itself on the relationships that have been established with leading retailers like Whole Foods (WFM), Kroger (KR) and so on. But that was when the term "organic and natural" had a special aura. Today, I can't say that's still the case. I believe the Street will soon wake up to this reality.
Consider this: In the most recent quarter, United Natural actually outperformed its own expectations. Not only did revenue jump almost 14% year-over-year to $1.6 billion, but United Natural posted a 22% surge in earnings, driven by effective cost-control measures and gross-margin improvement.
Investors have to like that 13% of 14% overall revenue growth was "organic," which I thought was very fitting. This shows that management has a strong pulse on this business. And the strategies they've implemented to not only grow market share, but improve operational efficiency, are working.
Truth be told, given the company's 20-basis-point improvement in gross margin, United Natural's performance was more impressive relative to that of Sysco. That said, it certainly didn't escape me that United Natural ventured outside of the organic/fresh market to find growth. Management is looking to branch out beyond the organic territory.
That could be a smart move this quarter, but I question the long-term effectiveness of that strategy. What of the impact it will likely have on the company's margins? Without a crystal ball, I can't guarantee what direction management will take next or what the outcome might be.
What I do know, though, is that the Street has placed some huge bets on United Natural. That the stock was down after United Natural's exceptional quarter demonstrates how finicky investors can get when great results "only" meet expectations, many of which (as I see it) remain too high. And it certainly seems as if the Street was broadly unimpressed by management's guidance. Until, of course, Sysco opened its checkbook for US Foods.
Although United Natural Foods seem fresh, the term "watch what you eat" still applies. Indigestion from the stock just might be around the corner.
At the time of publication, the author held no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.