United Natural Foods (NASDAQ:UNFI) released its third-quarter earnings report, which was accompanied by a soft full-year revenue guidance. The release triggered a sell-off in its shares, which have been trading at premium valuations for a longer time now. The company failed, however, to meet the heightened expectations accompanied by such a valuation.
The shares had a terrible year so far, while the company continues to report double-digit growth. This makes the valuation rapidly more appealing, as I am a buyer around 20 times forward earnings if shares might prolong their correction a bit further.
United Natural Foods reported third-quarter revenues, which came in at $1.78 billion, up 13.8% on the year before.
Reported earnings rose by 15.1% to $31.6 million, as earnings were up by nine cents to $0.73 per share.
Looking Into The Results
Each of United Natural Food's channels saw growth, as the company has opened a distribution center in Wisconsin. The company will open another distribution facility in New York in the upcoming first quarter to facilitate future revenue growth.
The acquisition of Trudeau added just 1.2% in sales, and the remainder of growth was organic. Gross margins came in at 16.7%, which is down 10 basis points compared to last year due to the depreciation of the Canadian dollar.
This margin pressure was offset by a 13 basis point decline in operating expenses, which fell to 13.2% of sales. The company incurred $1.5 million in costs related to the Tony's Fine Foods acquisition and pre-opening expenses of the Wisconsin facility. Last year, the company's earnings took a $1.5 million impact as well. At the time, labor cost actions were the cause behind that.
As a result, operating income was up by a modest 7 basis points to 3.5% of sales.
Looking Into The Year
For the current fiscal year, United Natural Foods anticipates sales of $6.73 to $6.77 billion. This would represent an 11.0 to 11.6% increase in annual revenues, although revenues would have been up by 13.2 to 13.8%, adjusted for the 53rd week in 2013. The revenue outlook is in line with analysts', which were looking for full-year revenues of $6.70 to $6.78 billion.
GAAP earnings are seen up roughly 14% to $2.47 to $2.50 per share. Previously, the company expected earnings to come in between $2.45 and $2.51 per share.
No revenue or earnings contribution from Tony's Fine Foods is anticipated, although the company will take a $1.3 to $1.6 million charge related to the acquisition in the fiscal year 2014.
Valuing United Natural Foods
The company ended the quarter with $16.6 million in cash and equivalents. Total debt stands at $302.2 million, which results in a net debt position of around $285 million.
Factoring in the correction following the earnings release, with shares trading at $62.50 per share, the market values United Natural at $3.1 billion. This values the company at roughly 0.45 times annual revenues and 25 times annual earnings.
Given the leverage and growth opportunities, United Natural Foods does not pay a dividend.
Tony's Fine Foods Deal
Just a few weeks ago, United Natural Foods acquired Tony's Fine Foods in a $195 million deal. Tony's generates $714 million in revenues, which values the company at roughly 0.27 times annual revenues.
The deal will be accretive to earnings in the coming fiscal year, although the company failed to quantify the financial impact on earnings of the deal.
Implications For Shareholder
United Natural Foods has shown excellent long-term revenues, as well as earnings growth, while managing dilution of the shareholder base. However, the shares already trade at 25 times earnings, while the company is not paying a dividend. The high debt position following the Tony's deal will limit the possibilities for large future deal-making without causing dilution.
The deal with Tony's will add more than 10% in annual revenues, but will furthermore add to the debt load of the company.
That being said, the company operates in a very strong growth market which is still very fragmented. I am happy to pay a 20-22 times earnings multiple for this growth company with a proven track record. However, even after the latest correction, shares don't offer immediate appeal at 25 times earnings, despite the fact that shares have sold off nearly 20% this year.
Around $55, I might be inclined to pull the trigger, acquiring a premium name at 22 times current earnings, with a forward price-earnings ratio which is likely below 20 given the accretion of Tony's Fine Foods.
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