United Natural Foods (UNFI) is just starting to grow on me, perhaps like a fungus, but growing nonetheless.
I've got to admit that it's a name I've wanted to like, but have avoided taking a position in so far. As one of the worst performers in my 2019 Tax Loss Selling Recovery Tracking Portfolio, this distributor of natural and organic food products has been suffering under the weight of its acquisition of SUPERVALU that was completed in October.
The deal was so poorly received by the market that UNFI fell 16% when it was announced on July 26. Since then, UNFI shares have fallen an additional 70%, putting the total deal-related damage at more than 75%. The problem -- and this is one time that I agreed with the markets -- was that UNFI seemed to have overpaid for Supervalu. The $32.50-per-share buyout represented a 67% premium for Supervalu shares, but the level of debt UNFI assumed to make the deal happen -- including Supervalu's existing $1.6 billion -- overly leveraged the new entity. Once the deal was done, UNFI started its new life nearly $4 billion in debt, with an equity-market capitalization at just $1.2 billion. UNFI now boasts a market cap of just $541 million.
The reason I am starting to come around to UNFI is two-fold. First, the company is showing the ability to exceed consensus earnings estimates. Third-quarter earnings per share of 61 cents were better than the 52 cent consensus. Second-quarter earnings per share of 44 cents were double the consensus. Consensus estimates for next year of $1.84 per share put the forward-price earnings ratio at about 5.5. Interestingly, the consensus of 12 analysts is large for a company of this size, and the range of earnings projections is fairly wide with a low of $1.23 and a high of $2.50. This is a very low-margin business for sure, but one that is projected to generate more than $24.5 billion in revenue next year
Second, UNFI is reducing debt, which ended the latest quarter at $3.2 billion, through asset sales. Now, don't get wrong, that is still a mountain of debt, and for the quarter, net interest expense was still nearly $55 million, but there has been some progress. UNFI still has a lot of work to do, but there have been some positive steps.
The decision on whether or not to pull the trigger on UNFI (not quite there yet) is tempered these days, however, because of the continual lambasting that lower quality names are taking in this market. Have I mentioned another potential overhang; that I don't believe the Fed rate cuts that many are expecting will happen?
