EUR 850.00 For Business Accounts Only

Morningstar | Moat Proves Elusive for US Foods Despite Margin Improvements; Shares Fairly Valued

We are edging up our fair value estimate for no-moat US Foods to $34.50 from $33.50, primarily due to the time value of money, but we don’t view shares as attractive. We continue to believe that US Foods will grow organic revenue in line with the industry, for which we expect case growth of 1.2% to 1.5% over the next 10 years, plus 1.5% inflation, although we model inflation of 2.0% to 2.5% over the next two years due to higher protein prices stemming from China’s outbreak of African swine fever. We also expect an additional 1% bump in revenue from acquisitions, resulting in total long-term revenue growth of 3.7% to 4.0%. We think supply-chain cost savings will result in a 20-basis-point bump in gross margins over the next two years, partially offset by a 10-basis-point headwind in operational expenses driven by higher wage and healthcare costs, resulting in a 10-basis-point bump in operating margins, from 3.1% last year to 3.2% in 2020 and beyond.

Although US Foods is the second-largest U.S. food-service distributor, we have not found evidence of a moatworthy competitive edge. The most likely source would be a cost advantage, related to distribution costs (given closer proximity to customers) or scale-based advantages such as purchasing power and resources to provide differentiated services. While US Foods has used its resources to create some differentiated services for clients, such as an advanced technology platform and consulting services, this has not led to a competitive edge. Quantitative evidence can be found in organic market share gains, superior margins, and consistent economic profits. US Foods has fallen short on each of these metrics. The firm is awaiting federal approval of its pending acquisition of regional distributor Service Group of America. We believe this tie-up should improve US Foods’ scale in the West and Midwest, though it will still fall significantly short of narrow-moat Sysco’s proximity to customers and purchasing power.