United Natural Foods: Piper Jaffray Remains On Sidelines Despite Strong Results, Stock Up +15%

Piper Jaffray maintains its Neutral rating on United Natural Foods, Inc. UNFI, despite the organic food company delivering better-than-expected earnings for the third quarter and raising full-year guidance.

"While the business appears to be approaching an inflection point, we want to get more comfortable that organic growth can stabilize," analyst Sean Naughton wrote in a note.

United Natural Foods reported third quarter EPS of $0.76 versus the consensus' $0.66, while sales of $2.13 billion were modestly below $2.16 billion Street estimate.

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The real beat, however, came from its guidance projections. The food distributor raised its 2016 adjusted EPS outlook to $2.47 to $2.53 from a prior level of $2.34 to $2.44, with sales of $8.46 billion–$8.5 billion. The consensus estimate was $2.38 and $8.41 billion, respectively.

Not All Positives

Despite solid operating results relative to expectations, the company's gross margins were down 29bp year-over-year versus consensus of 60bp. In addition, sales came up short of consensus, and organic growth decelerated by about 130bp from the second quarter to about 5.2 percent.

"While deflation decelerated 90bp and did contribute to the drop in sales, it appears that units dropped to 4 percent as well. Overall, we would like to see the organic growth rate stabilize on either a 1- or 2-year basis and/or see gross margins inflect positively," Naughton highlighted.

Management Guides And Analyst's Adjusted Figures

Management guided free cash flow to $200 million to $220 million for the full year. Naughton currently estimate FCF of $205 million in FY16, or $4.07/share, a nice yield on the stock which is currently trading in the low $40 range.

The analyst raised his FY16 EPS estimate to $2.53 from $2.39 and FY17 EPS view to $2.69 from $2.55. Naughton also increased revenue forecast for FY16 and FY17 to $8.459 billion from $8.349 billion, and $9.229 billion from $9.109 billion, respectively.

At the time of writing, shares of United Natural Foods had climbed 15.23 percent to $44.73, while Naughton raised the price target on the stock to $40 from $33.