US Foods has been treading water for the past six months, recording a small return of 4.5% while holding steady at $95.45. The stock also fell short of the S&P 500’s 12.7% gain during that period.
Is now the time to buy US Foods, or should you be careful about including it in 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 sitting this one out for now. Here are three reasons we avoid 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 1.9% 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 an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
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. Free Cash Flow Projections Disappoint
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts’ consensus estimates show they’re expecting US Foods’s free cash flow margin of 2.4% for the last 12 months to remain the same.
Final Judgment
US Foods doesn’t pass our quality test. With its shares underperforming the market lately, the stock trades at 18.7× forward P/E (or $95.45 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of US Foods
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