One trend that is obvious in America is that we as a culture are becoming more and more aware of our diets, and specifically how bad they’ve been for a long time. Every time I go out to eat, or go to the grocery store, there seems to be a new way to replace something that has been a staple of my diet with a natural or organic version. The improving economy also works in favor of the trend, because it’s no big secret that it costs more to eat organic and natural foods, and more income means more money to upgrade one’s diet.
As investors, we try to get in on trends while they are still young, as this one is. We also look for companies that are well-diversified, fiscally sound, and have lots of growth potential. This is why my favorite way to ride the healthy lifestyle trend is with United Natural Foods, Inc. (NASDAQ:UNFI), the leading U.S. distributor of natural and organic foods.
What the Company Does
United Natural Foods, Inc. (NASDAQ:UNFI) distributes natural and organic products, including grocery items, produce, frozen food, supplements, personal care items, and more. The company has done very well as a result of expanding their number of suppliers and increasing their distribution capacity, as shown in the company’s 10-year revenue growth chart:
As I mentioned earlier, one of the things I love to see in potential long-term investments is diversification of the business. This way, if one part of their revenue stream goes bad, the overall bottom line is not severely impacted. United Natural Foods, Inc. (NASDAQ:UNFI) is diversified in terms of both suppliers and customers. As of last June, the company purchased products to distribute from around 4,800 different suppliers, the largest of which accounts for just 6% of all supplies. The company also serves over 23,000 customer locations, which are almost perfectly split between independent retailers (35%), natural food chains (36%), and conventional supermarkets and other stores (29%).
Whole Foods Market, Inc. (NASDAQ:WFM), the largest chain of health food stores is by far the biggest customer of United Natural Foods, accounting for 36% of sales, or the entire natural food chains portion of their business. While this does mean that more of their business is dependent on one customer, their agreement with Whole Foods Market, Inc. (NASDAQ:WFM), which was originally set to expire this year, has been extended until September 2020. If the growth of Whole Foods Market, Inc. (NASDAQ:WFM) is any indication, this should greatly benefit United Natural Foods, Inc. (NASDAQ:UNFI)’ bottom line for years to come.
With very strong growth projected over the next several years, United Natural Foods, Inc. (NASDAQ:UNFI) trades at a premium valuation of about 27 times last year’s earnings. The company is expected to earn $2.19 per share this year, and then $2.48 and $2.81 in 2014 and 2015, respectively. This translates to an average annual earnings growth rate of just over 13%, which justifies the premium. If the revenue growth chart is any indication, these projections look rather modest.
Alternatives: More Traditional Food Distributors
The alternative to United Natural Foods would be to invest in a traditional food distributor like SYSCO Corporation (NYSE:SYY). Sysco is one of the largest food distributors in the world, primarily serving the restaurant industry. The company distributes a variety of food products to about 400,000 customers in the U.S. and Canada. The restaurant industry is particularly susceptible to economic conditions, so SYSCO Corporation (NYSE:SYY)’s earnings are expected to grow at a nice 10% rate going forward. Sysco’s P/E of over 20 times TTM earnings seems a bit high, as I view the company’s growth potential a lot less favorably than United Natural Foods, Inc. (NASDAQ:UNFI), simply because Sysco has a lot less room to grow. On the positive side, SYSCO Corporation (NYSE:SYY) has an “A” credit rating from S&P, and pays a 3.2% dividend yield, which income-seeking investors are sure to like.
If you have limited risk tolerance and want income, buy Sysco. On the other hand, if you have an investment time frame of 10 years or more and are willing to accept a little more risk in exchange for higher potential, United Natural Foods, Inc. (NASDAQ:UNFI) could pay off tremendously, especially if the “health food” trend continues.
The article The Health-Food Trend Could Be Healthy For Your Portfolio, Too originally appeared on Fool.com and is written by Matthew Frankel.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Sysco and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Matthew 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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