Performance Food Group Company: Two Catalysts for Further Upside Potential in 2023
Performance Food Group Co (NYSE:PFGC) markets and distributes food products. It operates through three key business segments: Foodservice, Vistar, & Convenience. The firm is the third-largest U.S. food-service distributor behind Sysco and us Foods, with a 9% market share. More specifically the company is a foodservice distributor that provides food and related products to restaurants, healthcare facilities, schools, and other institutions.
Performance Food Group Co's Financial Performance in 2023
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. Both of them are fundamental factors, a surge in free cash flow generation for fiscal year 2023, 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 Fiscal Year 2023 Results
Performance Food Group Co reported fourth-quarter and full-year fiscal 2023 results and both of them were very strong. Fourth-quarter fiscal 2023 highlights showed that net sales increased 2% to $14.9 billion, gross profit improved 12% to $1.7 billion and net income increased to $150.1 million.
For the full-year fiscal 2023, the firm 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.
Significant Increase in Cash Flow
Still, 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 is a business in making a profit from its core operations, the latter is used for valuation purposes.
Performance Food Group Co for the full-year 2023 reported cash flow from operating activities of $832.1 million, versus $276.5 million for fiscal year 2022, and free cash flow of $562.4 million versus $61 million for fiscal year 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 of its outstanding common stock and as of July 1, 2023, approximately $288.8 million remained available for additional share repurchases. This means there is a lot of room for further share repurchases which in essence is positive stock dilution, helping higher stock price levels combined with the huge increase in the free cash flow growth.
Valuation of Performance Food Group Co's Shares
Overall, the shares of Performance Food Group Co 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 with a score of 6 out of 10, and very high scores for momentum and growth ranks, both of them having a 9 out of 10 score. Regarding the valuation, I believe the two fundamental factors mentioned above justify a higher stock price so overall I consider the shares now to be rather undervalued,
Performance Food Group Co's 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 Co 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 to the brand. 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.
Performance Food Group Co 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. The firm 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 the company to make better decisions about product assortment, pricing, and marketing. Furthermore, the firm has partnerships with several well-known brands, such as Coca-Cola, Pepsi, and Nestle. These partnerships give Performance Food Group Co access to exclusive products and marketing opportunities.
Overall, PFGC 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, and PFGC could face challenges in the future. For example, the company could be vulnerable to changes in consumer preferences or new technologies. Additionally, the company could face competition from larger, more well-funded competitors.
Despite these challenges, PFGC is well-positioned to continue to be a successful company in the food service distribution industry. The company has a strong track record, a loyal customer base, and many competitive advantages.
Performance Food Group Co's Fiscal 2024 Guidance
The food services company said that it expected sales between $59 billion and $60 billion in fiscal 2024. Notably, 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, according to FactSet. The company guided for first-quarter adjusted earnings of $360 million to $380 million, ahead of the $355 million expected by analysts, according to FactSet.
Final Thoughts on Performance Food Group Co's Future
Should the guidance for fiscal year 2024 prove to be accurate then Performance Food Group Co 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 fiscal year 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 the fiscal year 2024 could be higher than 5%. I like the very strong financial results for the fiscal year-2023 and believe that they fully justify potential upside momentum. Monitor these shares as I see enough hidden value now.
This article first appeared on GuruFocus.
