US Foods Holding Corp (NYSE:USFD) finds itself well-positioned for growth. The business-to-business provider of food products stands to benefit from more consumers eating out. It even boasts a relatively low valuation compared to its archrival. However, the balance sheet might harbor issues that could hurt USFD in a poor economy. Buying US Foods stock will likely profit investors, but only if the economy remains on a growth trajectory.

US Foods Stock Deserves More Attention

Although many Americans consume products provided by US Foods, the company goes unnoticed by most. US Foods markets food and non-food products to businesses who serve food to customers. Most consumers will think restaurants in this case, but its customer base also includes hospitals, nursing homes, country clubs, colleges, retailers and the military.

US Foods, along with peers such as Sysco Corporation (NYSE:SYY), Performance Food Group Co (NYSE:PFGC), and United Natural Foods, Inc. (NASDAQ:UNFI), has become more important for one simple reason. In 2015, restaurant spending outpaced grocery store spending for the first time in history.

Analysts believe the advent of two-income households and the preference by millennials to not cook drives this trend. Hence, food industry investors should regard USFD stock, along with the likes of Walmart Inc (NYSE:WMT) and Kroger Co (NYSE:KR), the nation’s two largest grocers.

After remaining in private hands since 2006, the company returned to public trading by launching an initial public offering of US Foods stock in 2016. It remains the second largest food distributor in the country, with only Sysco surpassing it in total sales. In fact, Sysco attempted to buy US Foods in 2013. However, Sysco ended merger talks in 2015 amid rejection by antitrust authorities.

Tread Carefully With US Foods Stock

Now, with no danger of a takeover, public trading and favorable trends, investors have many reasons to watch US Foods stock. Earnings growth stands as another reason. Although analysts predict flat income growth for 2018, they also predict double-digit income growth in 2019 and 2020. Archrival Sysco will also increase its income by double digits. However, valuations have remained lower. With the USFD stock price Wednesday at over $34 per share, the company was trading at a 17.5 price-to-earnings (PE) ratio. SYY was trading at a PE of 27.

However, the balance sheet shows some areas of concern. The combined short- and long-term debt levels stand at over $3.9 billion. That stands as a heavy, but manageable burden for a company with a $7.4 billion market cap and $2.75 billion. The total debt level stood at about $5 billion in 2013, so the debt picture has improved, albeit slowly.

The other concern is the content of the company’s asset base. As of the end of fiscal 2017, the company held just over $9 billion in total assets. However, of that $9 billion, $3.97 billion consists of goodwill. An additional $364 million falls into the more general intangibles category. I believe non-tangible assets have a place. Still, when non-tangible assets make up nearly half of an asset base, I become skeptical. Warren Buffett says, “only when the tide goes out do you discover who’s been swimming naked.” If the economy turns worse, USFD stock investors could easily become the victims of indecent exposure.

Fortunately, intangibles do not affect the company’s current ratio, which stands at a safe 1.4 level. Hence, as long as the economy continues to grow, US Foods stock should continue moving higher.

Bottom Line on US Foods Stock

Given the trend toward eating out and its double-digit profit growth, US Foods stock appears poised to rise. With a PE ratio of 17 and profit growth that will exceed 10% annually, US Foods appears positioned for growth. However, these numbers likely depend on a growing economy.

If economic growth turns negative, the increase in business the company now enjoys will likely return to the grocers. Also, high levels of debt and goodwill indicate a balance sheet that may be in worse shape than it appears. Those who buy USFD at this level will likely do well. However, if the economy turns, and US Foods starts to expose itself, cover your assets and sell.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.