US Foods Holding Corporation (NYSE: USFD) is exactly the kind of business that is boring and stable, with potential upside. The challenge for US Foods stock is how to grow its business organically, and take over market share in the food distribution business.
The fact that it is a distribution business is exactly what I love about it. The money is always in distribution.US Foods stock has benefited from its IPO by essentially being a middleman.
USFD stock drives revenue by marketing and distributing fresh, frozen, and dry food (as well as nonfood products) to everything from single and multiunit restaurants, national restaurant chains, nursing homes, hotels, country clubs, hospitals, government and military organizations, universities, and retail locations.
Despite being one of the two largest food distribution companies in the nation, US Foods Holding Corporation only holds an 8% market share. That obviously means there’s enormous real estate left to grab.
Problems with US Foods Stock
The problem is that US Foods stock has not been driven by increasing revenues over the years. Revenues have been relatively static, and increases in net income have mostly come through cost cuts.
A US Foods stock owner certainly isn’t going to complain about cost cuts, but there is a legitimate complaint to me made in terms of not being able to grow organically. Mind you, this is an extremely fragmented industry and the company has done numerous acquisitions.
However with this level of competition, it takes what is ordinarily a very profitable business and distribution and effectively makes it a commodity. That means lower margins.
It’s a little disappointing from this investors viewpoint to look at page five of the company’s recent presentation, and not see what I would regard as a visionary approach to growth. That being said the company is quite right in that this is a growing and resilient business. There is money to be made here, and US Foods stock demonstrates this.
There are some secular tailwinds that may help USFD stock going forward. Demographic changes in the push to digital are two elements that will drive independent restaurant growth. Believe it or not, independent restaurants make up a very large part of the entire sector and this is where the company wants to focus on its growth opportunity.
Looking Forward for USFD Stock
I don’t want to give the impression that things look bleak for the company’s future. That’s not the case at all. The company has outlined some very specific strategies in terms of targeting higher value customers. Getting smarter about which customers to pursue, looking at areas where they have not exploited possible advantages, and so on.
The trick, however, is going to be execution. This is not something which is going to change overnight. This is something which will slowly, and hopefully surely, will make itself apparent over time in the company’s financials.
What you have with USFD stock is a company that is earning a solid and predictable profit every year, that has solid and predictable free cash flow, and isn’t losing any ground.
That’s a great foundation to build from. USFD stock is not terribly expensive. I think if you are an investor who is looking for capital gain appreciation in the middle single digits, that may have the potential to grow over time and return 10% or more annually, then you may want to consider US Foods Holdings Corporation stock.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
