United Natural Foods has had an impressive run over the past six months as its shares have beaten the S&P 500 by 8.8%. The stock now trades at $48.29, marking a 22.8% gain. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in United Natural Foods, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think United Natural Foods Will Underperform?
Despite the momentum, we’re passing on United Natural Foods for now. Here are three reasons why UNFI doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, United Natural Foods’s 1.2% annualized revenue growth over the last three years was weak. This was below our standards.
2. Low Gross Margin Reveals Weak Structural Profitability
At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.
United Natural Foods has bad unit economics for a consumer staples company, signaling it operates in a competitive market and lacks pricing power because its products can be substituted. As you can see below, it averaged a 13.4% gross margin over the last two years. That means United Natural Foods paid its suppliers a lot of money ($86.57 for every $100 in revenue) to run its business.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for United Natural Foods, its EPS declined by 20.9% annually over the last three years while its revenue grew by 1.2%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
We see the value of companies helping consumers, but in the case of United Natural Foods, we’re out. With its shares beating the market recently, the stock trades at 15.7× forward P/E (or $48.29 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. Let us point you toward a top digital advertising platform riding the creator economy.
Stocks We Like More Than United Natural Foods
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