About US Foods
We’ve done our fair share of research on major food and kitchen supply distribution companies.
They serve a very important role in our communities both domestically and internationally. Given that this is the case, there are companies that serve customers such as restaurants, cafeterias, hospitals and other dining venues only in certain regions while others dominate a significant portion of the distribution across the United States.
US Foods is the latter.
We’re here to give you an overview of US Foods because they fit that category as well.
More specifically, one of MacroHint’s founding partners is currently a student manager at one of his University’s dining halls and has been overwhelmed by US Foods.
Well, ok, overwhelmed is a strong word but let’s just say he’s found himself all too often surrounded by crackers distributed with US Foods logo on them along with other appliances marketed and distributed by the company.
So of course, if they distribute crackers and disposables then we guess that means we must write an article on the company’s stock.
All jokes aside, these kinds of companies, both small and large play crucial roles in providing sustenance for all walks of life and even during a global health pandemic and while enduring significant supply chain challenges and providing for likely millions across the country.
Let’s let the fun commence in our journey to ultimately decide whether or not US Foods’ stock is worth considering investing in for the long haul.
US Foods’ stock financials
The company currently has a share price of around $30, a price-to-earnings (P/E) ratio of just south of 41, a market capitalization of $6.8 billion and does not offer investors an annual dividend.
The initial financial metrics aren’t encouraging as the stock’s P/E ratio indicates that the company is trading at a multiple way above fair value (or what it’s worth paying for) since it is generally accepted that a P/E of 20 indicates that a stock is trading exactly at fair value and anything higher implies that the stock is overvalued.
On this basis, the stock is objectively overvalued.
We also aren’t exactly thrilled that the company doesn’t offer investors any sort of annual dividend especially given its lackluster returns over the past five years (simply looking at the stock’s price chart) which in itself is ok but compared to the competition’s past performance, it’s subpar to say the least.
According to the company’s balance sheet, US Foods’ management team maintains around $12.5 billion in total assets matched with approximately $8.2 billion in total liabilities.
The food service and distribution industry is a tough one given that it is quite sensitive to fluctuating commodity costs (including gas prices) so it makes sense that this company has a higher level of total liabilities. However, we’re definitely grateful that its total assets outweigh its total liabilities nevertheless.
It should also be noted that the company’s total liability increased substantially during 2021 and 2022 (as of January 1st) when compared to levels in 2020 and years prior. We think this should invoke a bit of assurance in prospective or current investors given that the last few years have been rough for many small and large businesses, again, especially in the food distribution industry.
We think the company’s management team will likely be able to pare down its total liabilities as the economic backdrop becomes more favorable.
All in all, the way we see it, US Foods has a solid and acceptable balance sheet.
Onto the company’s revenue over the past five years (according to the income statement), it has been consistent as it was with Sysco, ranging from almost $22.9 billion up to nearly $30 billion. For years to come, we confidently expect US Foods’ total revenue to stay within this range given that the company probably has long-term contracts with the venues it provides food and materials for and that generally speaking, regardless of the overall state of the economy people still tend to eat the same amounts habitually regardless of where they are in their lives professionally.
As it relates to the company’s cash flow statement, US Foods reported only one negative year of net income (in 2021) of -$226 million which makes complete sense given the state of the economy during that year and the year prior as well as the handful of other headwinds the company was sorting through.
While we’re not trying to necessarily take it easy on US Foods given that it’s a multi-billion dollar publicly traded company, we want to be fair in recognizing that even the largest and most established of companies can control so much in terms of cost pressures and other associated economic threats.
That being said, the company has been able to generate consistent amounts of total cash from operations over the last five years, however it has dipped around $300 million between 2019 and 2021 and 2022 which is hopefully a trend that will be snapped in years to come.
But if the company’s total cash from operations continues to trend downward at this rate, then we think there is real, grave cause for concern.
This company needs a lot of cash given all of its moving parts.
US Foods’ stock fundamentals
In terms of the company’s profitability in comparison to its peers, it’s not exciting and is actually disappointing from our vantage point.
For instance, the company’s current trailing twelve month (TTM) net profit margin is 0.61% to the industry’s average of 2.36%, according to TD Ameritrade’s platform.
This company’s TTM net profit margin is very, very low.
In fact, we haven’t yet seen a company as large as US Foods that has such a low net profit margin. This could be caused by a variety of reasons but whatever they are, justified or not, it doesn’t detract from the fact that it is low.
Speaking of low, the company’s TTM returns on equity, assets and investment are all presently lower than that of industry by uncomfortably wide margins. As an example, the company’s TTM returns on investment sit at 1.93% compared to the industry’s average of 11.98%, according to TD Ameritrade’s platform.
US Foods has missed the mark on both of these crucial financial metrics. Given this honest but fair assessment, we think the company ought to consider what could perhaps be a game changer or at least another means by which it can inch closer towards higher profitability.
It’s acquisition time.
A proposition for US Foods
While the company focuses predominantly on food distribution, we think it might be worthwhile for the company’s executive team to look into acquiring privately held foodservice equipment provider Edward Don & Company.
From glassware and flatware to kitchen supplies and equipment as well as kitchen cleaning products along with disposables, Don might be a company worth pursuing for US Foods. While US Foods has a strong hand in the food space, it would likely serve the company well to expand its product offerings in order to both become more competitive with Sysco but also generate more revenue and inevitably profit, while steering a bit clearer of food-related inflationary costs.
Although as previously seen US Foods is in a fairly mediocre financial state, we still don’t have many doubts in its ability to take on some more debt (without becoming overleveraged to the point of filing for bankruptcy) and receive adequate financing to seal a potential deal with Don.
However, if this were to actually to become a reality and US Foods formally announced its intentions of purchasing Don, it might be rather difficult given that it has been family owned since 1921, as members of the Don family might be quite reluctant to give up the company given its storied and profitable history.
This possible threat aside, in order to stay competitive and generate long-term shareholder value, we don’t think this would be a bad avenue for US Foods to travel down.
Should you buy US Foods’ stock?
Given all of the information we’ve gathered, this stock is not one we will be actively seeking. Its share price appears to be overvalued, its fundamentals and financials are as mediocre-to-weak as they get (generally speaking) and it brushes up against quite the formidable foe, Sysco.
Additionally, through no fault of its own, the current economic and business landscape isn’t conducive to this company’s success, however if the company looked into making a strategic alliance and/or ultimate acquisition of Don after the recession, we’d be interested in investing if the deal came into fruition.
We currently give US Foods’ stock a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.