Organic Foods: From Farm to Fork
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the many macroeconomic distractions across the globe, it is easy to lose sight of great secular trends. One of the strongest ongoing secular trends is the move toward a healthier lifestyle, as more Americans realize the benefits of physical activity and whole foods. Hain Celestial Group (NASDAQ: HAIN), United Natural Foods (NASDAQ: UNFI), Whole Foods Market (NASDAQ: WFM), and The Fresh Market (NASDAQ: TFM) are well positioned to capitalize on the trend. However, the question remains: which company is the best way to gain exposure to trend?
Hain Celestial Group
Hain Celestial Group is a leading natural and organic packaged and processed goods company, selling products under Celestial Seasonings, Terra, Garden of Eatin’, Earth’s Best, and many other brands. Hain grew sales and earnings at compound annual growth rates of 2.6% and 5.7% over the last three years, respectively. Although this growth is rather unimpressive, investors expect sales to rise as more of Hain’s brands enter the larger distribution channels of major supermarkets and Wal-Mart. With only $1.33 billion in sales, Hain still represents only a small portion of the packaged goods space, and its $2.5 billion enterprise value makes it right-sized for a takeout. Lastly, Hain trades at a reasonable valuation when adjusted for growth, trading with a PEG ratio of 2.46 (compared to J.M. Smucker’s 2.3, Unilever’s 2.26, and B&G Food’s 2.12).
United Natural Foods
United Natural Foods distributes natural, organic, and specialty foods in the United States and Canada to Whole Foods, Kroger, Costco, and Safeway. The company grew sales and earnings at compound annual growth rate of 10.41% and 14.13% since 2008, respectively. Moreover, United Natural is poised to continue its growth by expanding into traditional supermarkets, increasing share with its current customers, and increasing efficiencies in its distribution network. Conversely, the company would suffer if Whole Foods decided to build their own distribution network. Lastly, United Natural also appears fairly priced on a growth-adjusted basis, trading with a PEG ratio just over 2 (Sysco, its closest public comp, trades at a PEG of 2.5).
Whole Foods is the largest natural and organic food supermarket, operating 324 stores in the United States and Canada. The company grew sales and earnings over the last three years at compound rates of 8.32% and 26.64%, respectively. Moreover, the company's comparable store sales grew 9.5% in its most recent quarter, exceding even their brisk average of 8% over the last few years. Also, Whole Foods consistently achieves sales per square foot around $850, well in excess of the median supermarket sales per square foot of around $450. The company is also still growing stores, planning to build 24-27 stores this year and 28-32 stores in 2013. However, Whole Food’s growth story does not come cheap. The company trades at 34x forward earnings and a PEG ratio of 2.5, making it the most expensive company in the space.
The Fresh Market
The Fresh Market is also a specialty retailer. The company builds smaller stores (21,000 square feet compared with 38,000 for Whole Foods and 61,000 for Kroger), and its 113 stores are almost entirely in the southeast United States. Over the last three years The Fresh Market grew revenues at an 8.71% compound annual growth rate; earnings fell over the same time period. Going forward, the company plans to grow through same store sale growth (forecasting 4.5-6.5% growth) and by expanding its store count (the company sees a market for 500 stores). Lastly, The Fresh Market’s $2.6 billion market cap makes it, like Hain, right-sized for a takeover. The Fresh Market is similarly valued to Whole Foods, trading around 31x forward earnings and a PEG ratio of 2. However, since The Fresh Market has sales per square foot of $493, I believe the premium somewhat unjustified.
Hain offers growth at a reasonable price with the possibility of a takeout. However, since the company has delivered less than stellar growth in the past and plays in an extremely competitive space, I am weary of its future success. The Fresh Market also fits the bill as a takeout target; however, since Whole Foods is beating it on many key metrics and trades at a similar valuation, if I were not looking to play for the takeout, I would buy Whole Foods over The Fresh Market. I believe United Natural Foods offers the best growth/safety in the group. The company has demonstrated its abilities to grow sales and earnings and has laid out a plan to continue their growth. The main concern for the company is Whole Foods deciding to do its own distribution, but I do not believe they will do so until growth in their core business (building new stores) slows.
dtlly has no positions in the stocks mentioned above. The Motley Fool owns shares of The Hain Celestial Group and Whole Foods Market. Motley Fool newsletter services recommend The Fresh Market, The Hain Celestial Group, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.