Morningstar | US Foods Boasts Sales Gains Despite Intense Competitive Pressures, but Shares Strike Us as Inflated
No-moat US Foods' first-quarter results exhibit the prudence of its strategic endeavor to increase its exposure to independent restaurants (at the expense of lower-margin chain operators) and drive cost savings (anchored in improving the efficiency of its supply chain and distribution, salesforce productivity, and vendor management). Organic sales increased 3.6%, reflecting a 2.2% contribution from food cost inflation (concentrated in poultry, produce, and grocery) as well as a 1.4% benefit from volume growth. Adjusted gross margins stayed flat at 17.4% despite continued inflationary headwinds stemming from freight, distribution, and wage costs.Management held the line on its full-year outlook for case growth of 1%-2% and earnings per share of $2.15-$2.25, which generally aligns with our forecast. As such, we see little to warrant a change to our $31.50 fair value estimate (outside of a modest bump to account for the time value of money) or long-term outlook for 4% annual sales growth and operating margins edging up to just north of 3% by fiscal 2028. The shares appreciated another 4% on the news and are at a 20% premium to our assessment of intrinsic value, so we’d suggest remaining on the sidelines.
Digging into US Foods' performance, the one standout remains the continued growth in organic independent case volume, which soared 5.5% on top of a 2.7% gain in the year-ago period. We think these results point to the firm’s efforts to elevate its mix of customer offerings, including the enhancement of e-commerce ordering. The use of its e-commerce platform now amounts to close to 60% of all company transactions (up from less than 45% in 2016), which we think should help combat high-fixed-cost, low-margin industry trends and further deepen customer relationships. But given the intense competitive landscape, we don’t believe this is sufficient to warrant a moat.
US Foods Holding. through its subsidiaries, markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the United States. These customer locations include independently owned single and multi-unit restaurants, regional concepts, national restaurant chains, hospitals, nursing homes, hotels and motels, country clubs, government and military organizations, colleges and universities, and retail locations. The company provides fresh, frozen, and dry food stock-keeping units as well as non-food items, sourced from suppliers. The company's network of distribution facilities and trucks allow the company to operate and provide customer service.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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