United Natural Foods, Inc. (NASDAQ:UNFI) is differentiated from both Sysco and Core-Mark, in that it mainly distributes natural and specialty products. The competitive landscape is highly fragmented, with a large number of local and regional players. United Natural Foods has been a primary supplier to Whole Foods Market, Inc. (NASDAQ:WFM) for more than a decade, with its current contract running until 2020. It is also expanding its customer base by targeting supermarkets, food service producers, and gourmet stores.
Core-Mark is valued at a discount to its peers with a forward P/E of 13, compared with forward P/E ratios of 17 and 22 for Sysco and United Natural Foods, respectively. According to estimates from Yahoo Finance, analysts expect Core-Mark and United Natural Foods to grow at a CAGR of 14% for the next five years, compared with a five-year CAGR of 6% for Sysco. Unfortunately, for those investors considering United Natural Foods, growth expectations have already been factored into its stock price at a PEG of 1.68. In contrast, Core-Mark is fairly valued on an absolute basis at a PEG of 1.06. In addition, Core-Mark has the strongest balance sheet of the three, with a net gearing below 10%.
The biggest risk facing wholesale distributors is that many customers decide to do their own distribution as they grow bigger and want to achieve more cost savings. I am more comfortable with Core-Mark in that aspect, as its core customer base of owners of singe-location convenience stores are more likely to stay put. Also, as more single convenience stores come on stream, and Core-Mark increases its market share at the expense of DSD vendors going forward, the market will be likely to have more confidence in Core-Mark’s growth prospects. I expect Core-Mark to be re-rated and catch up with peers, like United Natural Foods, in terms of valuation.
The article Will You Be On The Mark With This Core Stock Pick? originally appeared on Fool.com and is written by Mark Lin.
Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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