After Management Changes, Morgan Stanley Predicts Nearly 30% Rally for Food Service Stock

Investor Bullish on U.S Foods Following Upgrades by Morgan Stanley

Management Changes Create Opportunities for Growth

Analyst Brian Harbour has upgraded food distributor service U.S Foods' stock to overweight from equal weight and increased the price target by $8 to $54, showing potential for the stock to rally by 29.7% within the next 12 months. The stock has outperformed the market and risen 22.4% in 2023. Harbour said he is increasingly bullish on the company following the management changes last year and its agreement with an activist shareholder.

Recovery and Fundamental Factors

According to Harbour, U.S Foods has always maintained stable product assortment and technology, but struggled with operational efficiency, execution, and service in the past. The company's improvement in case growth and profit demonstrates a business-driven performance that's beyond just post-pandemic recovery. Harbour believes that more consistent performance compared to expectations could help the company bridge the valuation gap versus peers.

U.S. Foods is the Pure Play for Broadline Distribution

Harbour also noted that U.S Foods is the "pure play" for U.S. broadline distribution compared to its competitors. Working with businesses that aren't restaurants also makes the stock more attractive relative to peers. Cash and carry opportunities, although only accounting for 5% of sale estimates, provide optionality to the business. It caters to a more price-sensitive consumer and could be resilient if the macroeconomy wanes.

Consistency in Financial Performance

Better financials and consistency in that area could help support the stock's valuation, Harbour said. U.S Foods has a cleaner balance sheet than it has historically, and more focus on its service, operational efficiency, and execution. Harbour is increasingly bullish on the company based on management’s focus post-activist involvement and business improvements already made.

Performance Food Group Sees Downgrade

Meanwhile, Harbour downgraded Performance Food Group to equal weight from overweight, although the price target still shows a potential rally of 17.2% in the next year. It comes as the food service distributor has seen its price rise 50.1% in the past year versus 23.8% for the S&P 500.
In summary, U.S Foods' recent upgrades and improvements under new management have made it a more attractive investment option. The company's consistency in financial performance and its status as the "pure play" for U.S. broadline distribution have analysts bullish on its potential for growth. Furthermore, the company's ability to cater to a more price-sensitive consumer and provide cash and carry opportunities may help it remain resilient in uncertain macroeconomic conditions. This news could impact a new business by providing insights into the importance of consistent financial performance and operational efficiency. By focusing on these areas, businesses can improve their valuation and attract interest from investors. Additionally, U.S Foods' success in pivoting to non-restaurant businesses highlights the benefits of diversification and identifying new markets to serve. Finally, the downgrade of Performance Food Group suggests that it is important not only to focus on a company's successes but also to consider its valuation relative to peers.