Since July 2021, the S&P 500 has delivered a total return of 77.6%. But one standout stock has more than doubled the market - over the past five years, Performance Food Group has surged 160% to $113.18 per share. Its momentum hasn’t stopped as it’s also gained 18.7% in the last six months, beating the S&P by 7.3%.
Is there a buying opportunity in Performance Food Group, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Performance Food Group Will Underperform?
We’re glad investors have benefited from the price increase, but we’re sitting this one out for now. Here are three reasons why there are better opportunities than PFGC, 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, Performance Food Group’s units sold averaged 6.6% 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. 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.
Performance Food Group 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 1.2%, below what we’d expect for a consumer discretionary business.
3. New Investments Bear Fruit as ROIC Jumps
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Over the last few years, Performance Food Group’s ROIC averaged 2.2 percentage point increases each year. This is a good sign, and we hope the company can continue improving.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Performance Food Group, we’ll be cheering from the sidelines. With its shares outperforming the market lately, the stock trades at 21× forward P/E (or $113.18 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward the most dominant software business in the world.
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