United Natural Foods Leaves a Bad Taste After 3Q Earnings Miss

NEW YORK (TheStreet) -- The rising popularity of organic and natural foods among consumers has been a boon for food distributor United Natural Foods (UNFI), which has grown annual revenue by some 300% just in the past decade. But that's history.

All that matters now is the company's poor performance. For that reason, the best course is to wait on investing.

In the past two quarters United Natural Foods has posted earnings that have fallen shy of Wall Street's estimates, with the stock getting punished as a result. Shares, which closed at $63, are down more than 4% in the past week, down over 16% in the past three months and down nearly 19% for the year to date.

If you're thinking about buying UNFI stock at this level, think again. The Providence, R.I., company has cut its business outlook for the rest of the year so the stock is likely to perform worse before it gets better. 

Founded in 2006, United Natural Foods wants to lead a food distribution market that is currently fragmented. One of its goals is to emerge a leader in the natural, organic and specialty products wholesale distribution business -- one that serves large areas in U.S. and Canadian markets.

United Natural Foods has had plenty of success, growing revenue from around $2 billion in 2005 to a projected $8 billion for full-year 2015. All told, for almost a decade UNFI has been an important part of the food distribution business. But over the past year investors have starved for higher profits. That's something UNFI failed again to deliver when it reported Tuesday.

For the quarter that ended in April, the company reported a profit of $41.8 million, or 83 cents per share. On an adjusted basis, excluding out one-time gains and costs, earnings came to 78 cents per share, missing the average analyst estimate of 86 cents.

Third-quarter revenue of $2.11 billion also fell shy of Street forecasts by some $30 million. With the company projecting full-year earnings in the range of $2.84 to $2.88 per share, far below the consensus estimate of $2.92, UNFI stock will remain under pressure. Revenue is now projected to grow at just 20% above last year, below analysts' average revenue growth rate of almost 22%.

In addition, these shares are still expensive at more than 23 times earnings, against a price to earnings ratio of 21 for the S&P 500. Given the struggles and the weakness implied in its business outlook, UNFI should at best trade on par with the rest of the market. If it did, UNFI stock would be valued today at 13% lower or around $53 per share, not $61.

Also, thanks to cutting its full-year outlook for 2015, analysts will now have to adjust their projections for full-year 2016 by at least 2%, assuming UNFI meets the mid-range of its full-year 2015 earnings outlook of, say, $2.86 per share.

This puts 2016 earnings projections at around $3.25, down from current consensus of $3.32. Even then, the forward P/E is still two points higher than the S&P 500, implying limited value for a stock that is showing weakness in its execution.

The best play here is to wait for the shares to fall to around $55 and then re-evaluate where UNFI is relative to the overall market.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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