This Messy, Pricey Acquisition Has Created a Healthy Opportunity

Food distributor United Natural Foods bought grocery retailer SuperValu in 2018. Integrating the acquisition has been messy and expensive. Wall Street hates both those things. Following the SVU purchase UNFI's shares were pummeled, dropping from north of $30 to as low as $6.56. An acquisition-related, $424.5 million write-off of goodwill and asset impairment values in fiscal 2020's Q1, muddied the waters once again. That non-cash charge-off means UNFI will likely be operating tax-free for the next few years. All told, adjusted earnings estimates for fiscal 2020, which ends Aug. 1 now sit at $1.60 per share. From 2010 through 2018, United Natural Foods carried an average price-to-earnings, or P/E, of 19.9-times. On Friday, UNFI closed at just $8.48, though went up slightly on Monday. Still, that's only 5.3-times the company's already reduced estimate. Over time it's almost certain that UNFI's multiple will rebound towards a more typical level. Assume just a 12-times P/E and the stock could bounce back to above $19 by the end of this summer. That's not a far-fetched dream. In the nine years stretching from 2010 right through 2018, holders of UNFI had chances to exit the shares between $39 and $83. Early 2019 saw UNFI top out at $15.56. The stock's longer-term potential is nothing short of spectacular. Value Line's analyst sees UNFI's EPS rising to $2.60 by 2024. A very conservative 12-times multiple, rather than its 19-times historical P/E, supports a mid-point two to four year target price of $31.20. Two directors took advantage of UNFI's 2019 plunge last October by buying a total of 40,000 shares for an average cost of $7.05. As of Thursday, they were already up more than 20%, on paper gains. United Natural found solid support the only three times it ventured below $7. It bounced by over 100% from its August 2019 nadir to its September 2019 peak. It gained close to 54% from, its mid-October low to its early December high. A mid-December pullback to $6.84 was simply a preface to a four-week, 38.1% rise. Quarterly EPS comparisons are expected to turn positive when UNFI reports its end-of-July numbers. I'm guessing the stock will pick up way ahead of that as the market tends to get ahead of coming trends rather than waiting for them to be obvious to everybody. Once it becomes clear that profits are improving UNFI might rocket higher in the blink of an eye. Independent research from Morningstar rates the stock as neutral right now while calling present-day fair value as $22.91. Potential gain appears to far outweigh the risk of seeing negative price action. Value Line covers 1,700 stocks in its main research universe. Each week it tabulates the best buys from among those meeting strict valuation and balance sheet related metrics. As of this weekend, UNFI topped the list. Tutor Perini , another of my recent buys, was slotted into the second spot. Subscribers with access to Real Money Pro can read my article on TPC for further details. Many previous bargain basement stocks have proved to be excellent performers for those with reasonable time horizons of about 12 to 24 months. Option-savvy traders can play the stock via Aug. 21, 2020 expiration date calls and puts. Actual bid/ask pricing, with UNFI at $8.47, are shown below. It is noteworthy to see the generous bids for UNFI's way out-of-the-money $12.50 and $15 call options. Buyers of those calls, if held through expiration day, could only make money if UNFI improves to from $13.20 to $15.30 over the coming seven months. Writing Aug. 21, 2020 $7.5 puts would mean standing ready to buy UNFI at no more than $6.15 per share. UNFI hasn't changed hands that cheaply in more than 15 years. UNFI appears set to provide generous profits for both traders and investors. Buy some shares, play some options, or consider doing both. Disclosure: Long UNFI shares, short UNFI options.

This Messy, Pricey Acquisition Has Created a Healthy Opportunity

Following its buy of SuperValu, United Natural Foods is good for a trade or investment.

Columnist Conversation

This Weekend on Real Money

The INDU and the DIA

Webinar Time After the Close Thursday

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.