United Natural Foods (UNFI) is currently priced at $32 and change, slightly above its 52-week high of $31.84. To provide some context, UNFI’s 52-week high is a lofty $52.69. The food company recently acquired SUPERVALU INC (SVU). Investors far and wide agree UNFI paid an exorbitant premium for SUPERVALU. Break down the numbers and you will find UNFI paid nearly a 70% premium over SUPERVALU’s closing sock price.
All in all, UNFI will pay an incredible $1.3 billion for the supermarket operator and food wholesaler. The fact that SUPERVALU has nearly $3 billion in debt is the equivalent of sprinkling salt in the wound. The deal sent UNFI shares down more than 15%. This just might be the optimal time to establish a position in the beleaguered food company.
UNFI executives frame the recent acquisition of SUPERVALU as a victory as it will allegedly bolster and diversify its business. It is certainly possible the deal will permit rapid growth during an era of rampant consolidation throughout the grocery industry. The acquisition speeds up the company’s growth strategy dubbed “Build out the Store” as it extends UNFI product offerings and expands the potential customer pool.
UNFI has led the charge in natural and organic foods, both of which are trending upward. The implementation of SUPERVALU’s products makes UNFI’s appeal that much stronger. The deal creates $175 million worth of synergy that could increase earnings per share by upwards of 10%. The fact that the United States’ top wholesale grocery supply business also bid for SUPERVALU is a testament to the company’s value. Prospective investors should put the purchase price to the side, and focus on the fact that UNFI will quickly become that much larger and more powerful. UNFI is now capable of competing with Amazon’s Whole Foods.
UNFI bears are adamant the company paid an egregious sum of money for SUPERVALU. Though the acquisition tacks on an outrageous sum of debt to UNFI’s balance sheet, the company can afford this temporary financial setback. UNFI executives are well aware of the fact that its EBITDA-do-debt radio is lofty yet this metric will decline in the years to come. Indeed, once SUPERVALU retail assets are sold and debt is paid, UNFI will be in the catbird seat.
UNFI has had some capacity problems in recent years. Company executives have addressed these demands, insisting distribution centers have made the appropriate adjustments to accommodate the ever-increasing demand. Capital investments combined with the acquisition of SUPERVALU will certainly help supply balance out with demand.
The company is also leasing space that shares a border with current manufacturing and distribution centers. Though UNFI has double-digit growth, there is no guarantee it will continue now that Amazon has entered the same space. If UNFI can continue growing its customer base in this rapidly expanding sector of the grocery business, the future is bright. If the company loses a substantial portion of market share to Amazon’s Whole Foods, UNFI’s stock could be headed for a steady decline.
Investors abide by the mantra of buying low and selling high. UNFI is hovering around its 52-week low following the heavily-criticized acquisition of SUPERVALU, and the emergence of Amazon as a power player in the grocery industry. However, UNFI stands to benefit if the federal government cracks down on Amazon for monopolistic practices. Rumblings of government interference with Amazon are enough to send UNFI’s stock higher.
If you have any interest in investing in UNFI, now is the time to establish a minor stake.
Regards,
Ethan Warrick
Editor
Wealth Authority
