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Here's Why United Natural Appears to be a Palatable Stock

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Several food companies are benefiting from rising demand owing to increased at-home consumption and stockpiling trends amid coronavirus. The packaged food space is especially gaining on such trends as the lockdown has prompted shoppers to buy and hoard packaged food and beverages. This has boosted sales of several food players, including United Natural Foods, Inc. (UNFI - Free Report) . Additionally, the company has been gaining from strength in its supernatural channel and contributions from buyouts.

Courtesy of such upsides, this Zacks Rank #1 (Strong Buy) stock has surged 45.8% in the past three months compared with the industry’s growth of 34%.  Moreover, the company has a VGM Score of A. Certainly, United Natural appears to be a solid bet at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Coronavirus-Led Demand & View Fuel Estimates

The company has been gaining from burgeoning demand stemming from the coronavirus-led pantry loading of essential items. Demand for United Natural’s products shot up in mid-March and remained high, thereby boosting its sales and earnings in the third quarter of fiscal 2020. During the quarter, earnings gained on higher sales and fixed cost leverage, while sales were backed by robust coronavirus-led demand, including gains from cross-selling and solid performance of private brands. These trends continued in the fourth quarter, with wholesale net sales for the first four weeks of the quarter up approximately 11%. Notably, the company is on track to generate cross-selling revenues of more than $175 million this year. United Natural’s ability to cater to the rising demand amid the pandemic reflects its robust market position and the important role it plays in North America’s food supply chain.

Even Kellogg (K - Free Report) , Kraft Heinz (KHC - Free Report) and Flowers Foods (FLO - Free Report) benefited from the burgeoning demand stemming from the coronavirus-led stock hoarding. Meanwhile, United Natural expects demand for its natural, fresh and conventional products to remain high. This along with integration synergies related to Supervalu is expected to help the company end fiscal 2020 on a strong note. In its third-quarter conference call, it provided an updated view that reflects the impact of including Retail in continuing operations. For fiscal 2020, management now anticipates net sales of $26.4-$26.6 billion compared with $23.5-$24.3 billion projected during the second-quarter earnings call. Adjusted EBITDA is now anticipated in a band of $655-$670 million, up from the previous view of $520-$560 million. The company now envisions adjusted earnings per share of $2.30-$2.50, significantly higher than the old guidance of 85 cents to $1.45.

We note that the consensus mark for fiscal 2020 earnings per share has moved north by 14.7% to $2.50 over the past 30 days.

Other Growth Drivers

United Natural’s Supernatural channel has been witnessing robust growth for a while. In the third quarter, Supernatural net sales rose more than 16% year over year, continuing its robust trend that was further enhanced by the coronavirus-led demand. Management had earlier stated that it is optimistic about its prime delivery across a number of markets globally in this channel. Further, the company has been undertaking various acquisitions over the years to expand its distribution network and customer base and boost long-term growth. In this regard, United Natural completed the buyout of SUPERVALU in October 2018. The enhanced scale of the combined entities has aided the company’s performance. Moreover, the merger has provided better-competing grounds for the company in the grocery space by augmenting offerings.

These upsides together with United Natural’s focus on improving margins and cash flows tell a lot about its growth prospects.

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