Performance Food Group Company: a downgrade after a tasty upward run (NYSE: PFGC)

At the end of October last year, I found myself search in Company of the Performance Food Group (NYSE:PFGC), a company that focuses largely on food distribution. The company serves more than 300,000 customer locations from as many as 142 distribution centers. This making it a giant in the field, as also evidenced by the fact that in 2023 alone, the company generated $57.25 billion in revenue. At the time I was writing about the company, I felt pretty optimistic about it. Until then, shares had declined, even though revenues and profits had risen nicely. Additionally, management had high expectations for the coming years. Add to that the way the stock was valued, and I couldn’t help but give it a ‘buy’ rating.

Every time I give a company a “buy” rating, it’s my statement that I believe stocks are expected to outperform the broader market for the foreseeable future. And outperformed Performance Food Group. However, the increase was only marginal. While the S&P 500 is up 24.3% since this article was published, our prospect’s shares are up 26.6%. Now, with a slightly higher stock price and a few more quarters of data under our belt, it makes sense to revisit the company. While the stock may be cheap in absolute terms, it is more expensive than before. Plus, compared to similar companies, the stock isn’t exactly cheap. Given these factors, I would say that a downgrade to “retain” would not be a bad idea at this point.

A downgrade despite continued growth

Generally, a downgrade has a negative connotation. But for me, that’s not always the case. For example, basically, Performance Food Group is doing very well. Consider financial results for the second quarter of fiscal 2024. Revenue at that time was $14.30 billion. This represents an increase of 2.9% from the $13.90 billion generated in the same period of fiscal 2023. According to management, although the company was hit by a drop in selling prices, at namely a 1.4% deflationary impact on price per case, total organic case volume increased 2.1% year over year. This was driven by strong demand for Performance Brands suitcases, which fueled an 8.7% increase in independent organic suitcases on a year-over-year basis. The company’s restaurant chain operations, as well as Vistar, have seen good year-over-year growth thanks to strong demand.

Digging into the company’s specific segments, the Foodservice segment saw a 2.6% year-over-year sales increase. According to management, this is the result of organic growth driven not only by expansion with existing customers, but also by winning new customers. Even more impressive was the 7.4% increase in revenue associated with the company’s Vistar operations. But since sales from this part of the business still only represent 8.4% of revenue, this increase hasn’t had such a huge impact on the company. Nonetheless, management attributed this primarily to higher per-case sales prices due to inflationary pressures the company may have placed on its customers, as well as growth in case volume in vending machines, supplies office, office coffee service and travel channels. It also benefited from an unspecified amount from an acquisition the company completed.

The increase in income was accompanied by an increase in profits. Net income fell from $78.3 million to $71.1 million. This represents an increase of 10.1% year-on-year. On this front, the company benefited from an increase in its gross margin from 10.79% to 11.18%. While that doesn’t seem like a big difference, when applied to the type of revenue generated during the second quarter, it translates to an additional profit of $55.8 million. Other profitability indicators followed suit. Operating cash flow increased from $108.6 million to $466.9 million. As good as this increase is, once we adjust for changes in working capital, we are actually left with a slight decrease, from $258.9 million to $256.8 million. Meanwhile, the company’s EBITDA increased from $308.8 million to $345.4 million.

The second trimester in itself is not an anomaly. As you can see in the chart above, the financial results for the first half of fiscal 2024 exceeded the results observed for the same period of 2023. Unlike the second quarter itself, the outperformance was widespread for the first. half the year. It’s also worth noting that management has some pretty interesting guidance for the company. You see, for the current fiscal year, they are still forecast revenues of between $59 and $60 billion. At the midpoint, this would be 3.9% higher than what was seen in 2023. Investors should therefore expect a slight acceleration in revenue growth. Ultimately, management expects EBITDA in the range of $1.45 billion to $1.50 billion. No estimates have been provided when it comes to adjusted operating cash flows. But based on my own estimates, we should be looking at an investment of about $1.13 billion for the year.

Interestingly, management is also maintaining its guidance for 2025. Through organic means and acquisitions, management is targeting revenue next year of between $62 billion and $64 billion, with EBITDA expected to be between $1.5 and $1.7 billion. By my own estimates, this would translate to net income of $466.1 million and adjusted operating cash flow of approximately $1.22 billion.

Taking all of these numbers, I was then able to value the company as shown in the chart above. This includes historical results for 2023, as well as estimated results for 2024 and 2025. All things considered, ignoring the price-to-earnings approach, the shares look quite affordable on an absolute basis. However, they are more expensive than when I previously wrote about the company. In the table below, I compared the company to five similar companies. And in all three cases, three of the five entities turned out to be cheaper than it.

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Take away

Based on the data provided, I would say that Performance Food Group continues to be a quality company that should, in the long term, do quite well. This does not mean that investors should subscribe to it. Personally, I view the shares as reasonably priced. But compared to similar companies, it is significantly closer to fair value. Given that a value investor’s goal is to acquire low-priced stocks, stocks with a nice margin of safety, and given how much stocks have risen in recent months , I would say the shares deserve a modest and respectful downgrade to a “hold” as opposed to the “buy” I previously had them at.