As StreetInsider.com tells it, UBS sees a disconnect between opinion and fact at the organic foods distributor, which is giving investors a chance to buy the stock at a discount. “United Natural Foods, Inc. (NASDAQ:UNFI) is benefiting from strong industry dynamics in the near and long term,” writes the analyst, because “demand has accelerated after a slow start to the year.” Yet UBS thinks the stock’s valuation of 25 times earnings is too low, and implies that investors have little faith that the trend toward organic shopping will continue.
Me, I think investors just have no faith that the stock is cheap enough to buy. Consider: 25 times earnings is already a pretty rich price to pay for a company that pays no dividend, and that most analysts think will grow at only 15% per year over the next five years. Adding to the bear case against United Natural, the company generated less than $37 million in real free cash flow over the past year — despite reporting GAAP earnings of more than $98 million. This means that for every $1 United Natural Foods, Inc. (NASDAQ:UNFI) claimed to have “earned” last year, the company really only generated about $0.38 in real cash profits…
…and it means that a stock that looks expensive at 25 times earnings looks even more overpriced at more than 66 times free cash flow. Long story short, UBS is wrong to be recommending that investors bottom-fish at United Natural. Buying this health-foods stock could be hazardous to your wealth.
The article Monday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel.
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