As the main foodservice distributor within the US and now the biggest comfort retailer distributor (publish acquisition of Core-Mark), Performance Food Group (NYSE:PFGC) affords traders a good way to play the post-COVID foodservice demand rebound. Over the long term, PFGC can also be positioned to realize share in foodservice and comfort whereas rising margins by extracting extra working efficiencies amid an easing labor market. While a possible macro downturn might weigh on the P&L, the defensiveness of the enterprise mannequin ought to permit it to outperform – recall that in 2008/2009, PFGC sustained constructive progress, benefiting from channel diversification, in addition to its pricing energy.
Finally, current acquisitions (Eby-Brown and Reinhart in 2019 and Core-Mark in 2021) provide incremental earnings upside as PFGC unlocks synergies, whereas the robust steadiness sheet presents M&A-led progress optionality down the road. At ~13x PE (a deep low cost to historic ranges), traders do not want a lot to go proper for the stock to work.
Stage Set for High Single Digit % Growth Algorithm Through 2025
PFGC unveiled a brand new mid-term gross sales goal of $62-64bn at this yr’s investor day (webcast), factoring in a light recession on the low-end and a short-term macro slowdown on the mid-point. In each instances, the income CAGR holds at a powerful >7% from the 2022 base (gross sales steering of $50.5-51bn). Growth might be extra closely weighted to 2023, although, given the contribution from Core-Mark (double-digit % progress) earlier than normalizing to a mid-single-digit % progress algorithm in 2024/2025.
The income steering is sensible, in my opinion – PFGC is well-positioned to realize foodservice share because it re-focuses on new account era. Amid easing provide chain pressures and a restoration in fill charges post-COVID, PFGC’s new account era has already seen double-digit YoY progress momentum as of Q3 2022 (traditionally its main gross sales driver). Meanwhile, the comfort aspect ought to profit from PFGC’s transfer so as to add extra chain enterprise in 2023 in addition to its robust pipeline – a notable shift from its concentrate on independents in the course of the pandemic. Over the long term, the secular meals gross sales tailwind stays intact as nicely, supporting PFGC’s efforts to speed up new buyer acquisition and lengthen the expansion runway through opportunistic M&A.
Long-Term Margin Expansion Potential Intact
Building on the strong income steering, PFGC additionally signaled $1.5-1.7bn of adj EBITDA era via 2025 – a 17% CAGR relative to the 2022 base and nicely above the 7-8% income progress outlook on the midpoint. In different phrases, PFGC’s adj EBITDA margin is about to increase at a powerful 15-23bps/yr to 2.4-2.7% in 2025 – nicely above the two.0% information for 2022. The margin assumptions additionally embed cheap assumptions round deal synergies, steadily normalizing inflation ranges, and labor efficiencies post-COVID, leaving room for upward revisions within the coming quarters. Of notice, this yr’s monetary replace excludes any segmental element aside from that every one three companies would see adj EBITDA margin growth via 2025 – a justifiably conservative method, in my opinion, given the present macro uncertainty.
At first look, PFGC’s margin steering units a low bar – even when the low-margin tobacco section slows amid a broader financial slowdown, the higher-margin unbiased foodservice contribution ought to decide up the slack. In specific, the unique Performance Brands combine has seen regular progress and now contributes ~50% of all PFG unbiased instances, together with non-tobacco meals/drink inside comfort. In addition, PFGC may need held again on the long-term alternative to leverage working efficiencies to increase margins because the labor market eases and transitory prices fade post-COVID. With labor at ~70% of working prices and investments in warehouse/automation already set to ramp up within the subsequent yr or so, I see gross revenue outpacing expectations as commodity inflation eases as nicely. Plus, the corporate has confirmed its means to cross via inflation through pricing to guard its margins, so PFGC ought to proceed to have a strong base of profitability into the approaching years.
Unlocking Incremental Earnings from M&A
Unsurprisingly, future acquisitions will proceed to be an element within the newest mid-term plan, constructing on PFGC’s current M&A success. That mentioned, the steering solely requires a “small” future M&A contribution – seemingly an indication of conservatism by administration. Within the foodservice section, as an illustration, PFGC has beforehand signaled its willingness to pursue extra transformative acquisitions in areas the place its footprint is proscribed (e.g., the western area of the US). Given PFGC additionally advantages from robust relationships with different operators throughout the trade and has a demonstrated observe report of efficient integration, I’d pencil in a bigger contribution from future M&A alternatives. Balance sheet capability should not be a difficulty both – the two.5-3.5x leverage goal (vs. ~3.7x at present) appears to be like nicely inside attain, given the corporate’s regular money era.
For now, PFGC has its arms full with post-M&A integration – recall that the corporate acquired Eby-Brown in early 2019 to construct out its comfort retailer presence, adopted by Reinhart in the direction of the tip of 2019 to increase its broad line foodservice enterprise. Core-Mark, the latest main addition to the portfolio (late-2021), additional expands its comfort channel publicity. Though Core-Mark has been a drag on margins so far, PFGC stays on observe to unlock ~$40m alternative from value synergies by 2024 (~$15m to this point). Meanwhile, there’s extra to come back from the Reinhart integration as nicely – per steering, it will come primarily from distribution value financial savings from shared warehousing (albeit just a few years out), additional extending its earnings progress runway post-acquisition.
A Defensive Pick Poised to Ride Out Any Macro Turbulence
Coming out of the pandemic, PFGC appears to be like set to construct on share features with independents because it re-focuses on new enterprise era amid a restoration within the legacy Vistar enterprise and unlocks new cross-selling/synergy alternatives following the acquisition of Core-Mark. While PFGC’s margin profile has briefly moved decrease following the Core-Mark acquisition, the long-term margin growth outlook stays intact as PFGC leverages its expanded scale and operations to drive working leverage advantages throughout the enterprise. Net, PFGC has the resilience to journey out a macro downturn, whereas from a valuation perspective, the undemanding ~13x P/E (a large low cost to historic ranges) affords ample re-rating potential going ahead.