Morningstar | Performance Food Brews Up Deal to Bolster Vistar Business; Shares Still Not a Bargain
No-moat Performance Food Group announced on March 19 its intention to bring privately held Eby-Brown, a wholesale consumer product distributor, into its fold. The deal will significantly expand PFG's sales base, adding more than $5 billion in sales on a base of around $18 billion. However, we don’t anticipate a material change to our $29.50 fair value estimate, since the acquired operations probably boast more tepid profitability metrics, in line with management’s assessment that the transaction is expected to be neutral or only slightly accretive to the consolidated firm’s adjusted earnings in fiscal 2020. Financial terms of the transaction weren’t disclosed.From a strategic perspective, we think the deal is quite prudent. With Eby-Brown’s focus on delivering a consortium of candy, snacks, and tobacco offerings to the convenience store channel, we view this tie-up as a means to expand PFG's Vistar business, which has continuously been the company's shining star. We’ve long held that this portion of the business is especially advantageous in regards to its contribution to the firm’s overall profit profile, with margins double those of the restaurant segment. But despite outsize growth of late, we think its current trajectory will ultimately prove unsustainable in this competitive arena. As such, we forecast average segment sales and profit growth will amount to 8% and 9%, respectively, over the next 10 years. This underlies our consolidated outlook for around 4% average annual sales growth and 60 basis points of operating margin improvement over the next decade to 2%.
This news does little to sway our Standard stewardship rating. PFG has historically grown by acquisition (similar to larger peers narrow-moat Sysco and no-moat US Foods). We think acting as a consolidator in this fragmented and competitive space stands to support PFG's scale and enhance its product offerings.
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.
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