Thursday’s Top Upgrades (and Downgrades): Honeywell International Inc. (HON), Tractor Supply Company (TSCO), United Natural Foods, Inc. (UNFI)

United Natural falls apart
Last and least, we come to organic food distributor United Natural Foods, Inc. (NASDAQ:UNFI), falling alongside Tractor Supply this morning, and for the same reason: a downgrade to “hold.” This time it’s analyst Argus Research that is holding the knife, but once again, it’s right to be cutting bait on an overpriced stock.

United Natural costs nearly 25 times earnings. It carries significantly more debt than cash, and generates paltry free cash flow of just $37 million per annum. That’s as compared to GAAP “profits” of $98 million. (In fact, United Natural Foods, Inc. (NASDAQ:UNFI) doesn’t even generate as much operating cash flow as it claims to be earning, let alone positive free cash flow.)

So what’s supporting the stock? Once again, it’s an enviable projected growth rate. Analysts expect United Natural to grow earnings 12% this year, and then accelerate toward near-15% annual growth over the next five years. The problem is that even if it does exactly what Wall Street promises it will do, the company’s weak free cash flow number, and unimpressive earnings, all mean the stock will still look vastly overvalued.

And what happens if United Natural Foods, Inc. (NASDAQ:UNFI) fails to produce the growth expected of it — as happened in last week’s earnings report, for example? That’ll be the time when United Natural’s growth thesis truly falls apart.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Thursday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.

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