Morningstar | No-Moat PFG's Shares Rich Despite Better Food-Service Growth Outlook and Eby-Brown Acquisition
We’re increasing our fair value estimate for no-moat Performance Food Group to $32.50 per share from $30.50 after incorporating the recent Eby-Brown acquisition and raising our revenue growth expectations for PFG’s food-service business, given the ramping productivity of the expanded salesforce. Our consolidated revenue growth outlook stays at 4.5% as our food-service segment assumption increases to 4.0% from 3.3% while our Vistar segment forecast falls to 5.4% from 7.5% due to the addition of the slower-growing Eby-Brown operations. The new business carries lower margins, so we expect operating margins to drop from 1.7% in 2018 to 1.3% in 2020 before gradually climbing back to 1.9% by the end of our explicit forecast, driven by customer and product mix benefits and improved Eby-Brown profitability. However, as the shares currently trade above our valuation, we suggest investors await a more attractive entry point.Despite improved food-service profits and the impressive growth and margins of the Vistar segment, we think a moat remains elusive for PFG. We have not found evidence of a cost advantage, the most likely moat source. The firm has not consistently reported economic profits, and the food-service business (59% of revenue) has not reported organic market share gains. When combined with its position as the third-largest player, we think this fails to suggest scale-based cost advantages. Similarly, we do not think the newly acquired Eby-Brown (the third-largest convenience store distributor) possesses a moat. The business is significantly smaller than the two largest nationwide distributors, appears to be losing share from our vantage point, and operates at a break-even level. The legacy Vistar business does exhibit signs of a competitive edge (consistent organic market share gains, high margins, dominant market shares), but at only 16% of the business, it is not material enough to affect the competitive standing of PFG overall, in our view.
Performance Food Group is a holding company. Through its subsidiaries, the company markets and distributes food and food-related products. The company's products include frozen foods, such as meats, appetizers and entrees, fruits, vegetables, and desserts; canned and dry foods; fresh meats; dairy products; beverage products; imported specialties; fresh produce; and candy, snack, and other products. The company also supplies non-food items including paper products such as pizza boxes, disposable napkins, plates and cups; tableware such as china and silverware; cookware such as pots, pans, and utensils; restaurant and kitchen equipment and supplies; cigarettes and other tobacco products; and cleaning supplies.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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