Performance Food Group Co. (PFGC, Financial) markets and distributes food products. It operates through three key business segments: Foodservice, Vistar and Convenience. The company is the third-largest U.S. food-service distributor behind Sysco (SYY, Financial) and U.S. Foods (USFD, Financial), with a 9% market share. It provides food and related products to restaurants, health care facilities, schools and other institutions.
The shares have not moved much in 2023, having moderate gains of about 7.5%. However, I believe there are now two important catalysts that have a high chance of supporting higher prices: a surge in free cash flow generation and a continuous share repurchases program. Additionally, the company issued fiscal year 2024 guidance that signals stable revenue growth, which should support profit margin expansion.
Strong results
On Wednesday, Performance Food Group reported fourth-quarter and full-year 2023 results that were very strong.
Quarterly net sales increased 2% to $14.9 billion, while the gross profit improved 12% to $1.7 billion and net income grew to $150.1 million.
For the full year, the company reported that total case volume grew 6%, net sales increased 13% to $57.3 billion, gross profit improved 19% to $6.3 billion and net income increased to $397.2 million. Improved profitability is among the top drivers of a high-quality business model.
The figures I like most in these financial results have to do with cash flow from operating activities and free cash flow. The former shows how efficient a business is in making a profit from its core operations, while the latter is used for valuation purposes.
For the year, Performance Food Group reported cash flow from operating activities of $832.1 million, up from $276.5 million a year ago, and free cash flow of $562.4 million versus $61 million in 2022. This increase of nearly 820% for free cash flow is outstanding.
The company has authorized a new share repurchase program for up to $300 million worth of its outstanding common stock. As of July 1, approximately $288.8 million remained available for additional share repurchases. This means there is a lot of room for further share repurchases, which is essentially positive stock dilution, helping higher stock price levels combined with the huge increase in the free cash flow growth.
Valuation
Overall, the shares of Performance Food Group seem to be fairly valued with a GF Value of $63.4, a profitability rank of 7 out of 10, a moderate financial strength rank of 6 out of 10 and very high scores for momentum and growth at 9 out of 10.
I believe the two fundamental factors mentioned above justify a higher stock price, so overall I consider the shares now to be rather undervalued,
Economic moat
The company has several factors that contribute to its economic moat, including brand recognition and customer loyalty, economies of scale, network effects, data and analytics and brand partnerships.
Performance Food Group has been in business for over 100 years and has a strong brand reputation. The company is known for its high-quality products and services, and its customers are loyal. This makes it difficult for new entrants to compete, as they would need to spend a lot of money to build up their own brand reputation.
It is a large company with a national footprint. This allows it to benefit from economies of scale, such as lower transportation costs and better pricing from suppliers. Performance Food Group has a network of distribution centers and warehouses that allows it to deliver products quickly and efficiently to its customers. This network is difficult for new entrants to replicate.
Having such a large network allows the company to collect a large amount of data about its customers and products. This data allows it to make better decisions about product assortment, pricing and marketing. Furthermore, the company has partnerships with several well-known brands, such as Coca-Cola (KO, Financial), PepsiCo (PEP, Financial) and Nestlé (XSWX:NESN, Financial). These partnerships give Performance Food Group access to exclusive products and marketing opportunities.
Overall, the company has a strong economic moat that should help it to sustain its competitive advantage in the food service distribution industry. However, it is important to note that no moat is absolute, so it could face challenges in the future. For example, the company could be vulnerable to changes in consumer preferences or new technologies. Additionally, Performance Food Group could face competition from larger, more well-funded competitors.
Despite these challenges, Performance Food Group is well-positioned to continue to be a successful company in the food service distribution industry with a strong track record, a loyal customer base and many competitive advantages.
2024 guidance
The food services company said it expects sales between $59 billion and $60 billion in fiscal 2024. In comparison, analysts polled by FactSet expect sales of $59.96 billion.
Additionally, the company anticipates adjusted earnings between $1.45 billion and $1.5 billion for fiscal 2024, compared with the $1.45 billion expected by analysts. The company guided for first-quarter adjusted earnings of $360 million to $380 million, ahead of the $355 million expected by analysts.
Final thoughts
Should the guidance for 2024 prove to be accurate, then Performance Food Group will report about a 5% sales growth versus fiscal year 2023, which will be much lower than the 13% revenue growth of fiscal year 2023 compared to 2022. This slowdown in sales growth is not positive. I argue that, in most cases, companies tend to be conservative in their estimates. Therefore, the sales growth for 2024 could be higher than 5%.
I like the very strong financial results for 2023 and believe that they fully justify potential upside momentum. Monitor the stock, as I see enough hidden value currently.
