Morningstar | Performance Food Delivers Case Volume Gains in 1Q, but Cost Pressures Endure; Shares a Bit Inflated
The market looked favorably on no-moat Performance Food Group's first-quarter results, which included a 4% bump in sales, a 40-basis-point uptick in gross margins to 13.1%, and flat operating margins at 1.1%. However, we don't think the resulting mid-single-digit share price rise reflects the persistent and sizable industry headwinds of intense competitive pressure and cost inflation, particularly as it relates to transportation and labor. As such, we’d suggest investors remain on the sidelines as the shares trade at nearly a 10% premium to our $29 fair value estimate.Vistar (which services theater, retail, and hospitality immediate consumption goods; around one fifth of consolidated sales ) was again the shining star with a 12% increase in sales and a more than 20% lift in EBITDA. We’ve long viewed this slice of the business as advantageous in regards to its contribution to the firm’s overall profit profile, with margins double the restaurant segment, but we don’t expect the current growth trajectory will persist. Rather, our long-term forecast is for average segment sales and profit growth of 8% and 9%, respectively, over the next 10 years. This underpins our consolidated outlook for around 4% average annual sales growth and 60 basis points of operating margin improvement over the next decade to 2%.
Similar to its peers, Performance echoed concerns about hiring and retaining workers, particularly truckers. We view this headwind as structural, stemming from the tight labor market, and expect these costs will remain elevated for the near term. We maintain a positive view of the firm’s increased focus on expanding its position with independent restaurants, which tend to be higher-margin sales than chain operators, given the enhanced value placed on data analytics, consulting, and e-commerce. However, we don’t expect these gains to come uncontested, as Sysco and US Foods target the same group.
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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