Two weeks before Thanksgiving, our Restaurants analyst Howard Penney added US Foods Holding Corp. (USFD) to his Best Ideas list as a long. Just a couple days before, Barron's wrote a feature story on Penney and some of his more vocal calls on high-profile stocks including Chipotle (CMG).
His outspoken and successful call on Chipotle was obviously a bearish one. But his latest call on USFD is bullish.
Penney recently wrote:
"As we quickly realized how great this company is, we couldn’t wait to do a Black Book in order to make the move. Fortunately or unfortunately, depending how you look at it, we were right and the stock is up over 13% since then, and we are just now announcing a Black Book presentation. The stock has received a number of upgrades and rightfully so, fortunately for us we see upside to the tune of ~30% from current levels."
His key points on US Foods include:
#1 MARGIN EXPANSION THROUGH MULTIPLE AVENUES
Pruning low margin distribution agreements and growing their private label sales have been two major initiatives to improve the profitability of the Company. Strategic national chain exits occurred from 2Q14 through 2Q16, while at the same time they have been growing the penetration of private brands which have expanded from 30% of sales in 2010 to 33% in 2016. These core initiatives coupled with further penetration of customers’ menu and technological enhancements to improve USFD operations as well as those of their customers are meaningful contributors to the growth in profitability.
#2 GROWTH WITH INDEPENDENTS AND HEALTHCARE SEGMENT
One of USFD’s biggest advantages is their positioning within the restaurant industry, dedicating themselves heavily to the independent and regional operators versus large/lower margin national chains. In addition to the profitability difference, the independents are faring better from a sales growth perspective than national chains, making it a stronger customer base. USFD’s growth in the healthcare segment is also notable, with the recent signing of a deal with Brookdale Senior Living, they continue to expand in this channel.
#3 DEBT BURDEN IMPROVING, ALLOWING FOR MORE M&A
Pre-IPO net debt/EBITDA was 5.3x, USFD used all of their $1.1 billion in IPO proceeds to lower their leverage, and have renegotiated many of their terms putting them in a much better financial position. As of the latest quarter they are down to a leverage multiple of 3.8x. Tuck in acquisitions are going to continue to be a major factor for both top line growth and profitability, of which they have done five in the last ten months with a combined run rate of $450-$500 million in net sales. In our opinion a major deal looms in the industry, that will create a more formidable #2.
