When the market is in panic I like to revisit big, secular themes. And with the industry set to double in size over the next ten years, it doesn’t get any bigger than organic food.
Of course, almost every investor knows Whole Foods Market, Inc. (NASDAQ:WFM) is the pure play on the booming organic grocery industry. The company is growing earnings at an 18% clip and set to triple its store count in the United States. The problem – Whole Foods could hardly be characterized as undiscovered. The stock has returned 260% over the past five years and looks a little rich at 36 times earnings.
Which is why I get excited when I find alternative ways to play the same trend, especially obscure names that are trading at a more reasonable valuation.
And that’s exactly what you get with United Natural Foods, Inc. (NASDAQ:UNFI).
The company is a leading distributor of natural, organic and specialty groceries. As the primary supplier for Whole Foods Market, Inc. (NASDAQ:WFM), accounting for a third of the United Natural Foods, Inc. (NASDAQ:UNFI)’s sales, the stock is a backdoor play on Whole Foods’ expansion.
Here are three reasons to consider adding the stock to your portfolio.
Organic foods are one of the few bright stories in the otherwise stagnant grocery store sector.
Today’s consumer is engaged when they shop. Customers base purchase decisions on their values and awareness of environmental and health concerns. Consumers increasingly prefer to keep their foods free from “something” be it pesticides, genetically modified foods, antibiotics, or hormones.
This has sparked a growing demand for organic foods. Last year, organic grocery sales exceeded $30 billion after growing 13% annually over the past ten years.
The movement has now gone mainstream. Today over 60% of consumers now buy some organic products and this is expected to increase as prices come down.
Analysts project the segment to grow 11% annually over the next three to five years providing a nice tail wind for organic names like United Natural.
Growth and margin expansion
Over the past six years, United Natural Foods, Inc. (NASDAQ:UNFI) has grown sales and operating income at a 13.6% and 11.7% annual clip, respectively.
But in addition to growing demand for organic foods, the company has several drivers that can propel earnings going forward:
Expanding Customers Base: Conventional supermarkets like Safeway are looking to expand their organic and natural food offerings in response to changing customer tastes. United Natural Foods, Inc. (NASDAQ:UNFI) is also expanding into new channels such as independents grocers, corporate food service provides, and gourmet stores.
International Growth: In 2010, United Natural acquired the Canadian food distribution assets of the SunOpta, Inc. (USA) (NASDAQ:STKL). The company is now focused on expanding its operations in Canada with a sales target of $450 million to $500 million – approximately 10% of its total sales.
Economies of Scale: The organic distribution business is fragmented. In the United States alone, there’s over 200 regional and national competitors. As a leading player, United Natural Foods, Inc. (NASDAQ:UNFI) is in the position to consolidate the industry and improve margins through greater economies of scale.
Taking market share
At first glance, larger rival SYSCO Corporation (NYSE:SYY) may appear to be the better investment choice. The stock trades at a cheaper 17 times forward earnings and sports a nice 3.3% dividend yield.
As the largest food distributor in the world, Sysco benefits from some serious economies of scale. The company generates thick – relative to the rest of the industry – 4.5% operating margins.