EUR 850.00 For Business Accounts Only

Morningstar | No-Moat US Foods Strives to Steady Its Footing, but Shares Still a Touch Rich

We don’t expect a material change to our $30.50 fair value estimate for no-moat US Foods following fourth-quarter results (0.8% net sales increase and flat adjusted operating margins at 3.4%) that aligned with our expectations, outside of a low-single-digit bump to account for the time value of money. Further, the firm’s fiscal 2019 guidance, calling for $2.15-$2.25 in EPS squares with our $2.20 forecast, and we see little to warrant a change to our long-term outlook (4% annual sales growth over the next decade and operating margins holding around 3%). Despite the mid-single-digit slide in shares, we view the stock as modestly overvalued and would suggest investors remain on the sidelines until a more attractive risk/reward opportunity emerges.

Over the near term and similar to its peers (narrow-moat Sysco and no-moat Performance Food Group), higher fuel and wage costs are poised to constrain profits--partially the result of recent truck driver shortages that are affecting a number of industries. And while these pressures are unlikely to subside, we don’t posit that the firm is sitting still. Rather, we think efforts to extract excess costs (anchored in improving the efficiency of its supply chain and distribution) and shift its mix to higher-margin independent restaurants are prudent, given the added value foodservice distributors like US Foods are able to offer (relative to chain restaurants where price is of prime importance, constraining profits). The fruits of this agenda were evident in the quarter, as volume faltered 1% in the aggregate but was up almost 4% within its mix of independent restaurants.

Despite this, we don’t surmise the current market price takes into account the outsize competitive headwinds that are pervading the industry (and are likely to do so longer term), with shares trading at a high-teens price/earnings multiple versus the mid-teens implied by our valuation. Although we perceive efforts to elevate its suite of customer services (e-commerce ordering and business support tools) as a means by which to enhance margins at US Foods and bolster case volume growth, we think operating margins will hover around 3%, lagging consensus forecasts calling for operating margins to expand to closer to 4% over the next several years.