Buy US Foods On Recent Weakness

Deutsche Bank recommended the pullback in US Foods Holding Corp USFD shares on wider industry concerns be treated as a buying opportunity.

Accordingly, the firm reiterated its Buy rating on the shares of US Foods with $33 price target.

Analyst Shane Higgins noted that the company reported second-quarter adjusted EBITDA in line with its estimate and the consensus, while also reaffirming its 2017 guidance for case volume growth and adjusted EBITDA growth.

Higgins feels the company put up a solid quarter. Notwithstanding this, the shares pulled back 4.6 percent on Wednesday compared to the flat performance by the S&P 500.

Positives

• Q2 Adjusted EBITDA: $286 million vs. DB's estimate of $287 million.
• Favorable gap between FIFO gross profit and adjusted operating expenditure.
• Independent case volume growth of 4.7 percent vs. 4 percent growth in Q1.
• Reduction in leverage to 3.5 times from 3.8 percent in Q1.

See also: The Restaurant Sector Q2 Earnings Cheat Sheet

Items On Watchlist

• Downgrade of 2017–2022 independent restaurant growth forecast by Restaurant Industry research and consulting firm Technomic.
• US Foods raising sales guidance by 200 basis points, citing higher inflation.
• FIFA gross margins declining 9 basis points due to the impact of inflation, which has an impact on gross margin percentage but less impact on gross profit dollars.

Deutsche Bank said US Foods is not seeing any indication of slowing growth in this key channel. Even if growth is slowing, the company is picking up share, the firm added.

With US Foods having less than a 10 percent stake in this highly-fragmented, but profitable market, the firm sees a lot of opportunity for the company to grow here, even if the channel's growth slows.

"We remain positive on USFD, as the company continues to execute on key initiatives to drive profitable case volume growth, while taking out costs and driving efficiencies, which should help deliver high-single digit EBITDA growth for many years," the firm said.