US Foods Holding Corp USFD's various initiatives to improve margins and accelerates growth creates a scenario in which the foodservice distribution company can grow its earnings better than its rivals.
The Analyst
Morgan Stanley's Vincent Sinisi upgraded US Foods from Equal-weight to Overweight with a price target lifted from $40 to $43.
The Thesis
US Foods' stock is trading at a valuation discount to its peers that can't be justified for three key reasons, Sinisi said in a note.
The company's top-line growth is set to accelerate from a low-single-digit to a mid-single-digit amid success in the high margin and high-growth independent restaurants segment while its e-commerce platform remains an industry leader.
After four consecutive quarters of expense leverage, US Foods is now in a position to accelerate SG&A leverage and gross margin expansion is now expected in the bottom half of 2018, Sinisi wrote. The Street is discounting this as the analyst is modeling a three-year EPS compounded annual growth rate of 28 percent through 2020, which is the highest rate among the foodservice sector.
US Foods will likely generate "significant" cash which will give management increased flexibility to consistently return capital to investors, the analyst wrote. Specifically, free cash flow should grow to $650 million by 2020 with share buybacks beginning in 2019 and accelerating in future years.
Price Action
Shares of US Foods Holding were trading higher by 2.6 percent at $34.97 Tuesday morning.
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