Performance Food Group Company: A Downgrade After A Tasty Run Higher (NYSE:PFGC) (2024)

Back in late October of last year, I found myself looking into Performance Food Group Company (NYSE:PFGC), an enterprise that focuses largely on food distribution. The firm services over 300,000 customer locations from no fewer than 142 distribution centers. This makes it a behemoth in the space, which is also evidenced by the fact that, in 2023 alone, the business generated $57.25 billion in revenue. Back when I wrote about the enterprise, I found myself feeling rather bullish about it. Leading up to that point, shares had been pulling back, even as revenue and profits rose nicely. What's more, management had some high expectations for the next couple of years. When you add on top of this how shares were priced, I could not help but to give it a ‘buy’ rating.

Whenever I give a company a ‘buy’ rating, it is my statement that I believe shares should outperform the broader market for the foreseeable future. And outperform Performance Food Group did. However, the increase was only marginally. While the S&P 500 has risen by 24.3% since the time that article was published, shares of our prospect grew by 26.6%. Now, with the stock trading quite a bit higher, and a couple of quarters of additional data under our belt, it makes sense to revisit the enterprise. While the stock might be cheap on an absolute basis, it is more expensive than it was previously. Furthermore, relative to similar firms, the stock is not exactly cheap. Given these factors, I would argue that a downgrade to a ‘hold’ would not be a bad idea at this point in time.

A downgrade despite continued growth

Usually, a downgrade has a negative connotation. But for me, that's not always the case. For instance, fundamentally speaking, Performance Food Group is doing really well for itself. Consider financial results for the second quarter of the 2024 fiscal year. Revenue for that time totaled $14.30 billion. That represents an increase of 2.9% compared to the $13.90 billion generated the same time of the 2023 fiscal year. According to management, even as the company was hit by decreased selling prices, namely a 1.4% deflationary impact in price per case, total organic case volume grew by 2.1% year over year. This was driven by strong demand for the Performance Brands cases, which fueled an 8.7% rise in organic independent cases on a year-over-year basis. The Foodservice Chain operations of the company, as well as Vistar, grew nicely year over year thanks to strong demand.

Digging into the specific segments of the company, the Foodservice segment reported a sales increase of 2.6% year over year. This, management said, was the result of organic growth caused not only by expanding with existing customers, but also by capturing new ones. Even more impressive was the 7.4% rise in revenue associated with the company’s Vistar operations. But with sales of that part of the company still accounting for only 8.4% of revenue, that increase didn't have all that huge an impact on the firm. All the same, management attributed this mostly to higher selling prices per case because of inflationary pressures that the company was able to push on to its customers, as well as case volume growth in vending, office supply, office coffee service, and travel channels. It also benefited by an unspecified amount from an acquisition that the company closed.

The rise in revenue brought with it higher profits. Net income jumped from $78.3 million to $71.1 million. That's a 10.1% rise year over year. On this front, the company benefited from a rise in its gross profit margin from 10.79% to 11.18%. While this might not seem like all that much of a difference, when applied to the kind of revenue generated in the second quarter on its own, it translates to an additional $55.8 million in profit. Other profitability metrics followed suit. Operating cash flow skyrocketed from $108.6 million to $466.9 million. As good as this rise was, however, once we adjust for changes in working capital, we actually end up with a slight decline from $258.9 million to $256.8 million. Meanwhile, EBITDA for the company popped up from $308.8 million to $345.4 million.

The second quarter on its own was not an anomaly. As you can see in the chart above, the financial results for the first half of the 2024 fiscal year beat out the results seen for the same time of 2023. Unlike the second quarter on its own, the outperformance was across the board for the first half of the year. It's also worth noting that management has some pretty interesting guidance for the enterprise. You see, for the current fiscal year, they are still forecasting revenue of between $59 billion and $60 billion. At the midpoint, that would be 3.9% higher than what was seen in 2023. So if anything, investors should expect revenue growth to accelerate a bit. On the bottom line, management expects EBITDA of between $1.45 billion and $1.50 billion. No estimates were provided when it involves adjusted operating cash flow. But based on my own estimates, we should be looking at around $1.13 billion for the year.

It is interesting to note that management also maintains guidance for 2025. Through both organic means and acquisitions, management is targeting revenue next year of between $62 billion and $64 billion, with EBITDA forecasted to be between $1.5 billion and $1.7 billion. Based on my own estimates, this would translate to net income of $466.1 million and adjusted operating cash flow of about $1.22 billion.

Taking all of these figures, I was then able to value the company as shown in the chart above. This includes the historical results for 2023, as well as estimated results for both 2024 and 2025. All things considered, if we ignore the price to earnings approach, shares look quite affordable on an absolute basis. However, they are more expensive than when I wrote about the company previously. In the table below, meanwhile, I compared the company to five similar firms. And in all three cases, three of the five entities ended up being cheaper than it.

Takeaway

Based on the data provided, I would argue that Performance Food Group continues to be a quality company that should, in the long run, do quite well for itself. This doesn't mean that investors should buy in. Personally, I do view shares as reasonably priced. But relative to similar firms, it's definitely closer to fair value. Seeing as how the objective of a value investor is to pick up shares on the cheap, shares with a nice margin of safety to them, and considering how much the stock has already risen in recent months, I would make the case that shares deserve a modest and respectful downgrade to a ‘hold’ as opposed to the ‘buy’ I had them at before.