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United Natural Foods, Inc. Covering Analyst: Matthew Miller Email: Miller24@uoregon.edu
Investment Thesis ›United Natural Foods has experienced significant growth ›Market has priced in expected growth ›Currently United Natural Food’s stock is overvalued
Business Overview ›Founded 1996 from merger of two regional distribution companies ›First nationwide distributor of natural, organic and specialty products ›First firm in U.S. certified by QAI
Scale of Operations ›U.S. & Canada ›27,000 customers ›26 distribution centers ›65,000 SKU’s ›4,800 suppliers
Products as Percent of Revenue
Wholesale Industry ›Revenue projected to decline by 1.5% in 2013 ›Low margins ›Competition from direct distribution
Natural & Organic Products Industry ›Growing at about 10% per year ›Expected to continue at 9% or higher ›Growth driven by demand for healthy and environmentally sustainable products
Comparables ›Growth ›Beta ›Margins ›Industry Similarities ›Market Capitalization
Comparables ›Whole Foods Market – 30% ›Costco – 30% ›Core-Mark – 20% ›Hain Celestial – 10% ›Sysco – 10%
Comparables Valuation Multiple Implied PriceWeight EV/Revenue 88.710.00% EV/Gross Profit 64.890.00% EV/EBIT52.2533.00% EV/EBITDA 49.3933.00% EV/(EBITDA-Capex)56.440.00% P/E 53.5034.00% Price Target $51.73 Current Price 52.49 Overvalued (1.44%)
DCF Analysis ›Revenue Model –4 segments ›Supernatural ›Conventional ›Natural Products Retailers ›Other ›Revenue growth driven by continued demand for healthy, safe & sustainable products
Percent of Revenue by Segment 2012
Revenue Mix Over Time
Percent of Revenue by Segment 2018
Whole Foods Market ›New stores opened in 2012 –25 ›In development –79 ›United Natural Foods primary supplier in all regions –Under contract through 2020
DCF Assumptions ›Cogs increasing as a % of revenue ›Gross margin decreasing ›SG & A decreasing as a % of revenue ›Operating margin expanding 9-12 bps
DCF Valuation ›Implied price of DCF: $38.10 ›Overvalued by 27.42%
DCF Valuation ›Possible reasons –Beta –Market Risk Premium
Sensitivity Analysis of Beta Implied Price Terminal Growth Rate 382.0%2.5%3.0%3.5%4.0% Adjusted Beta 0.6545.4950.4056.9366.0079.49 0.7538.2541.5845.8151.3558.92 0.8532.8235.1938.1041.7546.48 0.9528.6130.3532.4334.9838.14 1.0525.2526.5628.1129.9532.18
Sensitivity Analysis of Market Risk Premium Implied Price Terminal Growth Rate 382.0%2.5%3.0%3.5%4.0% Market Risk Premium 5%49.5055.4563.5475.2293.53 6%39.6643.2747.9054.0362.53 7%32.8235.1938.1041.7546.48 8%27.8029.4431.3833.7436.66 9%23.9725.1426.5128.1230.05
Implied Price Final Price Implied PriceWeight DCF Implied Price$38.1025.00% Comparables Implied Price$51.7375.00% Price Target $48.32 Current Price $52.49 Overvalued (7.94%)
Portfolio Position # of sharesCost Basis/shareCurrent PriceReturn Tall Firs350$34.87$52.7951.14% Svigals40$34.85$52.7951.48%
Note ›United Natural Foods reports 1 st quarter earnings Nov 30 –Expected Revenue: $1.381 Bn
›Based upon my DCF & comparables analysis, I found United Natural Food’s stock to be overvalued. Therefore, I recommend a sell for both the Tall Firs and Svigals portfolios. Recommendation
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