Hungry for Returns? Time to Dig Into This Stock

United Natural Foods has been punished for buying Super-Valu (previously SVU) in 2018. It definitely overpaid, as evidenced by subsequent write-downs, yet the combined company's adjusted earnings remained decent. Now, two years later, UNFI appears on the verge of benefiting from the cost cutting and synergies that were first imagined. Additionally, the large 2018 to 2019 non-cash write-offs of goodwill mean UNFI can operate virtually tax-free for years to come. Since the end of fiscal 2010, all major metrics improved greatly, yet, as of Friday, the share price was more than 56% lower than it sat exactly 10 years earlier. That spells upside opportunity. Covid-induced stay-at-home orders last winter actually helped UNFI post excellent earnings in the April and July quarters. People initially stocked up on paper goods and disposals, and then also switched from eating out to cooking at home. Fiscal Q3 saw earnings per share jump from $0.64 to $0.96. The fourth quarter, which ended Aug. 1, was even better; EPS surged by 147.2% year-over-year. The next two quarters figure to be blockbusters, as well, compared with fiscal 2020. That should be enough to get traders very interested in owning UNFI again. Overall, management now projects EPS of about $3.35 for the fiscal year ending next July. UNFI's 10-year median price-to-earnings has run about 21-times. Since 2016, it averaged 12.5-times, including super low numbers, by historical standards since the SVU acquisition. Assume a rebound to just 10-times this year's estimate on now rising profits and UNFI could easily be back above $33 by next summer. That implies better than a double is possible within 10-months. Note, too, that United Natural now sells for less than half its projected fiscal 2021-ending book value. It fetched up to three times book, back in 2014 and 2015. Yahoo Finance thinks UNFI can hit $23.25 by this time next year. That's less than my goal, but would still deliver almost 46% from UNFI's Nov. 8 quote. The shares changed hands at $22.71 as recently as June 8 and hit $21.78 intraday on Aug. 4, just over three months ago. The only real news since then was the much-better-than expected results for the quarter ended Aug. 1. Independent research house Morningstar notes the stock's 52-week peak of $23.38 and its insanely low price to sales ratio of 0.03-times. As net profit margins expand toward normal, there is tremendous operating leverage that could send EPS much, much higher. Even a partial rebound to about 0.75% net margin could see UNFI post EPS of about $3.78 per share this year rather than the somewhat conservative $3.35 estimate now in play. In the nine years stretching from fiscal 2010 to fiscal 2018 UNFI's net margins never averaged less than 1.4%. Taking all that into account Morningstar calls UNFI's present-day, not year-ahead, fair value as $24.64. Realizing just that number again would deliver better than 54% upside. Still not chomping at the bit to own UNFI? Consider this long-term, very conservative $15 strike price buy/write combination out to Jan. 20, 2023. You'll be amazed at how much profit you can make on a stock, which would not even have to go up from the day you buy it. The figures above detail the cash flow from a 1,000-share, 10-call and 10-put buy/write at the actual prices in play on Friday, with UNFI at $15.96. If held through expiration, there are just two possible outcomes. UNFI will either close at $15 or better, or below $15. If above, the following best-case scenario would unfold. The net gain on the entire combination would total $10,640 on each 1,000 shares. That's 244% for the entire 805-days or 110.65% annualized. Pretty nifty, I'd say, on a stock which did not even need to rise to achieve that. Outright buyers of UNFI at $15.96 who declined to add the option components would need to see their shares climb to $54.90 to pocket the same percentage gain. If UNFI fails to hold $15 on Jan. 20, 2023 the worst-case scenario detailed next would play out. You'd end up with a double-sized position in UNFI, but at an average cost of just $9.68 per share. Any drop of less than 39.3% from the trade inception price would allow for immediate liquidation for at least a small profit. That's a fine extra margin of safety, considering the upside potential if UNFI goes up, sideways or down less than tragically. Value Line's 2023 to 2025 projected price range for UNFI runs from $30 to $55 per share. Those figures are based on final EPS of $4.25 and a sustainable P/E of just 10-times. If things continue to go well, EPS and the stock's multiple will likely be much higher. Buy some UNFI shares, sell some LEAP puts out to Jan. 21, 2022 or Jan. 20, 2023 or consider setting up buy/write combinations at the suggested strike or perhaps even higher ones. My personal view is that United Natural Foods could easily reach, or exceed, $50 to $75 within a few years. It traded above $70 during 2013 through 2015 on EPS of $2.19, $2.53 and $2.50 respectively.

Hungry for Returns? Time to Dig Into This Stock

United Natural Foods' fundamentals surged, yet the stock sank. Now it's time to buy.

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