US Foods currently trades at $83.81 per share and has shown little upside over the past six months, posting a middling return of 1.1%. The stock also fell short of the S&P 500’s 9.5% gain during that period.
Is now the time to buy US Foods, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think US Foods Will Underperform?
We're cautious about US Foods. Here are three reasons there are better opportunities than USFD and a 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 Distributors company because there’s a ceiling to what customers will pay.
Over the last two years, US Foods’s units sold averaged 3.2% 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 might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 3% over the last two years. This profitability was inadequate for a consumer discretionary business and caused by its suboptimal cost structure.
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 over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 2.2%, lousy for a consumer discretionary business.
Final Judgment
US Foods doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 18.7× forward P/E (or $83.81 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
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