Whole Foods Market, Inc. (WFM), United Natural Foods, Inc. (UNFI): An Alternative Way to Play the Organic Boom

Page 1 of 2

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).

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.

Secular trend

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.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!