Since June 2021, the S&P 500 has delivered a total return of 72%. But one standout stock has doubled the market - over the past five years, US Foods has surged 146% to $95 per share. Its momentum hasn’t stopped as it’s also gained 24.4% in the last six months, beating the S&P by 18.1%.
Is there a buying opportunity in US Foods, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think US Foods Will Underperform?
We’re happy investors have made money, but we don’t have much confidence in US Foods. Here are three reasons you should be careful with USFD, plus one stock we’d rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Consumer Discretionary - Distributors company because there’s a ceiling to what customers will pay.
Over the last two years, US Foods’s units sold averaged 2.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Weak Operating Margin Could Cause Trouble
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
US Foods’s operating margin has more or less stayed the same over the last 12 months , and we generally like to see margin increases due to economies of scale and cost efficiency over time.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
US Foods has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 2.5%, below what we’d expect for a consumer discretionary business.
Final Judgment
US Foods falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 19.2× forward P/E (or $95 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Would Buy Instead of US Foods
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