In the Consumer Staples space, there’s just about no better spot to be than food distribution.
The stocks are cheap compared to sector peers, inflationary food trends could soon provide a lift, and Wall Street analysts aren’t bullish (not yet). Our favorite name in the food distribution category is U.S. Foods (USFD). In the video above, Hedgeye analyst Shayne Laidlaw lays out the bull case.
Here are some key takeaways:
- Profit Margin Expansion – The company is pruning low margin distribution agreements (strategic national chain exits from 2Q14 through 2Q16) and growing their private label sales (which has grown from 30% of sales in 2010 to 33% in 2016).
- Growth With Independents And Healthcare Segment – U.S. Foods has dedicated themselves heavily to the independent and regional operators versus large/lower margin national chains. Independents are faring better from a sales growth perspective, making it a stronger customer base. The company’s growth in the healthcare segment is also notable; with the recent signing of a deal with Brookdale Senior Living.
- Debt Burden Improving, Allowing For More M&A –Following the initial public offering, USFD used all of those $1.1 billion in proceeds to lower their leverage. Pre-IPO net debt/EBITDA (earnings before interest, taxes, depreciation and amortization) was 5.3x versus 3.8x today. In short, the company is in a much better financial position. Acquisitions will contribute to top line growth and profitability. In the last year, they have done five in roughly the last year with a combined run rate (i.e. annualized net sales) of $450-$500 million.
Want more on U.S. Foods and the Consumer Staples landscape?
Check out the Sector Spotlight presentation below, in which Laidlaw and Consumer Staples analyst Howard Penney discuss the key macro trends and their best ideas in the space.
