3 Food Distribution Stocks Poised for a Turnaround - Cabot Wealth Network

3 Food Distribution Stocks Poised for a Turnaround

Food distribution is big business. These food distribution stocks look like strong turnaround candidates.

Food distribution is big business. But food distribution stocks were hit hard during the pandemic. These three look poised for a turnaround.

When you grab a meal away from your home, unless it’s from a fast-food chain or major grocery store, you are probably an end-customer of the food distribution industry. There are hundreds of food distributors in the United States, who sell nearly everything a restaurant needs, from ingredients, frozen/fresh foods and prepared desserts to place-settings, cooking tools and cleaning supplies. With over 1.2 million food operators, including restaurants, hospitals, schools, lodging establishments, and corporate and government cafeterias, the food distribution industry is enormous, with an estimated $310 billion in total revenues. But which food distribution stocks are worth buying? I’ll get to that in a minute.

Revenues in the food distribution industry tend to be relatively stable. Margins are generally thin, and much of the cost structure, which includes a vast array of warehouses and trucks, is fixed. So, economies of scale have immense value in the industry. Not surprising, the top 50 companies hold a majority of the market share. Competition is fierce, as adding the incremental customer can be highly profitable.

The pandemic hit the industry hard. With most of their restaurant customers closed, distributors’ profits fell sharply, along with their share prices. Profits and share prices have now mostly recovered, but new problems have emerged, including rapidly rising input cost inflation and wage pressures. Investors are starting to wonder if the new Covid Delta variant will bring new restaurant closures.

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One risk that seems less worrisome today is the possibility that Amazon fully dives into the industry. An aggressive expansion would make sense, given their immense package distribution network and their Amazon Fresh/Whole Foods operations, but so far the company has shown only incremental interest.

The following three food distribution stocks look interesting as potential turnarounds. Valuations are reasonable and two companies have completely overhauled their management teams which could lead to improved operating performance.

3 Food Distribution Stocks – Time to Place an Order?

Food Distribution Stock #1: Sysco Corporation (SYY)

Sysco is the nation’s largest food distributor. Serving over 625,000 customer locations, it generates $50 billion in revenues, giving it a 16% market share. While SYY shares fully recovered from the pandemic, they have recently fallen off by about 18% – to their mid-2018 price level – on concerns over rising Covid cases as well as rising labor, transportation, food and other inflation. However, Sysco has an efficient cost structure and the widest margins (at about 5%), providing it with an edge to continue to gain market share. The company recently changed out its leadership, including the board chair, CEO and CFO. The new team outlined their strategy in May, highlighting plans to accelerate growth to 1.5x the market’s pace through digital tools, new products and acquisitions, as well as efficiency improvements. A new international head is working to re-energize sales outside of the United States, which comprise nearly 20% of total revenues. Sysco produces strong cash flow and has an investment grade balance sheet. The shares trade at a reasonable 13x EV/EBITDA multiple and pay a sustainable (and recently increased) dividend that yields 2.6%.

Food Distribution Stock #2: US Foods Holding Corp (USFD)

With about $25 billion in sales, US Foods sells to over 300,000 customer locations across the country, and has over 400,000 stock-keeping units sourced from more than 6,000 suppliers. The company operates 70 warehouses and a fleet of 6,500 trucks. Like SYY, USFD shares had fully rebounded from their pandemic lows, but have recently trailed off by about 15%, much for the same reasons. The company came out of the pandemic with a more efficient cost structure and greater ability to respond quickly to changes and opportunities, although it is still fighting gross margin pressures. Two recent acquisitions have saddled it with an unwieldy debt burden but one of them provided access to the growing cash-n-carry segment, which adds an interesting dimension to the story. The shares trade at a reasonable 9.6x EV/EBITDA multiple.

Food Distribution Stock #3: SpartanNash (SPTN)

SpartanNash is the nation’s fifth-largest food wholesaler, and specializes in distributing food and related products to independent and chain grocers. It is also the largest supplier to U.S. military commissaries, and owns 190 retail stores and fuel centers which generate a quarter of total sales. A new CEO (September 2020), followed by a new board chair, CFO and other senior leadership, are working to rejuvenate the company against relentless grocery industry competition, which has already led to better same-store sales compared to pre-pandemic levels. Their efforts to overhaul the supply chain may also expand its uninspiring margins. Since 2016, SpartanNash has supported Amazon’s online grocery delivery business, and this past October the company signed an agreement in which Amazon is receiving warrants for up to a 15% stake. This may portend an eventual acquisition, or it may simply be a predatory move by Amazon to capture some of the value of the business it sends to SpartanNash. The dividend, which produces a 4.3% yield, seems reasonably sustainable and the 7x EV/EBITDA multiple looks unchallenging.

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Bruce Kaser - Photo

Undervalued Stocks Expert Bruce Kaser

Bruce has more than 25 years of value investing experience, managing institutional portfolios, mutual funds, and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company. Now he is helping his Cabot Undervalued Stocks Advisor readers find those undervalued stocks that let you buy low and sell high!

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