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Organic Gains at United Natural Foods

United Natural Foods is the largest wholesale distributor to the natural, organic and specialty food industry in the U.S.

United Natural Foods (UNFI) is the largest wholesale distributor to the natural, organic and specialty food industry in the U.S. and Canada, says David Coleman, editor of Argus Research.

UNFI’s customers include natural and conventional supermarket chains, independent health food retailers, and businesses in the foodservice sector. It carries more than 110,000 different products and serves approximately 43,000 customers through its distribution centers.

We expect the company’s increasing shift from nonperishable to fresh foods to pressure earnings. Previously, only about one-fifth of revenue had come from fresh foods and produce.

However, United Natural Foods has been investing in cold-storage facilities and distribution centers, and has expanded its fresh foods business through a range of acquisitions, including Albert’s Organics, and, more recently, Haddon House, Global Organic/Specialty Source, Nor-Cal Produce, and Gourmet Guru.

On the 4th quarter conference call, CEO Steve Spinner said that he expected the company to make additional acquisitions in fiscal 2018.

On valuation, the stock trades at a discount to peers and toward the low end of its five-year average range for P/E, price/sales, and price/book; however, we believe that it merits higher multiples given the company’s improving growth prospects and ability to successfully integrate acquisitions.

The company has strengthened its balance sheet and issued solid full-year guidance. It is also pursuing accretive M&A deals, with four acquisitions in fiscal year 2017 and additional acquisitions likely in fiscal year 2018. We are raising our rating on United Natural Foods to Buy from Hold and setting a target price of $49.

David Coleman is editor of Argus Research.

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