EUR 850.00 For Business Accounts Only

Morningstar | Vistar Serves Up Strong Sales and Profits for Performance Food Group in 2Q; Shares Not Compelling

No-moat Performance Food Group delivered robust sales growth in its second quarter, up 7.1% on a reported basis, including a 3.6% benefit from organic case growth (total case volume jumped nearly 6%) as well as a 1% benefit from food cost inflation. While adjusted operating margins held at 1.7%, in line with the year-ago quarter, we think the sales improvement was what buoyed the stock, which was up by a high-single-digit percentage following results. However, results through the first six months of the year are tracking our full-year forecast for mid-single-digit sales growth and $1.78 in earnings per share, so we don’t intend to alter our $29 fair value estimate beyond a low-single-digit increase to account for additional cash generated since our last update. With the shares trading around a 30% premium to our valuation, we suggest investors remain on the sidelines for now, as we don’t believe the current share price reflects the persistent and sizable industry headwinds of intense competitive pressure and cost inflation stemming from higher transportation and labor costs of late.

As has been the case, the outperformance was particularly acute in the Vistar segment (around 20% of sales, which services theaters, vending machines, and retail), which boasted more than 12% sales growth and approximately 33% growth in adjusted EBITDA. We still believe this portion of the business is especially advantageous in regards to its contribution to the firm’s overall profit profile, with margins double the restaurant segment. However, we think current growth rates 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%.

From a capital-allocation perspective, despite the recent authorization of a $250 million share-repurchase program (the first in the company’s history, of which $245 million remains available), we expect the prime use of cash will center on pursuing acquisitions. The domestic food-service industry boasts around 15,000 smaller domestic distributors, setting the stage for the larger firms to serve as consolidators for years to come. While we don’t expect any potential tie-ups will come uncontested--as Sysco and US Foods are pursuing similar strategies to enhance their scale and product offerings over time--we think Performance is unlikely to veer from its past strategic bent of operating as a prudent steward of shareholder capital.