Considering all things, this may be a good time to buy food service distributor US Foods Holding Corp stock (NYSE: USFD). Let’s analyze. The company is facing some headwinds this year and the stock is down nearly 50% as of Jul 24, 2020, making it an inexpensive buy. But for anyone thinking of investing in the stock right now, three questions are critical to answer. First – (1) Why are investors so pessimistic about US Foods? (2) What could the demand recovery look like? (3) Is the company looking at a significant cash burn in 2020?
Let’s start with the first question. The reason is simple – US Foods was supplying to outlets such as restaurants, hospitals, hotels, country clubs, government and military organizations, colleges, and retail locations. Most of these outlets closed as a result of the pandemic, resulting in a disruption in operations. As far as the demand recovery goes, given that US Foods is involved in the distribution of essential supplies, it is only a matter of time before demand bounces back. As restaurants switch to home delivery, it will also mitigate the impact on US Foods’ operations. But what about the cash burn? We assess the Impact Of The Covid-19 Recession On US Foods in an interactive dashboard with a focus on its cash flow generation ability. Combining our analysis and analyst expectations this year, we find that US Foods is fairly secure and protected. This suggests that the current market price may present a buying opportunity for investors.
In 2019, US Foods saw net income of $385 million on a revenue base of $26 billion, implying a very low net margin of about 1.5%. However, that’s not surprising given that the food industry operates on very thin margins. Despite this, it managed to generated nearly $760 million in free cash flow from operations. However, the year 2020 is going to be different. Let’s do a financial stress test to judge US Foods’ ability to navigate this year’s economic crisis. Let’s look at a scenario where full year revenue drops 20% to $21 billion. This could imply a net loss of about $-861 million, and cash flow from operations dropping to $-486 million. In such a scenario, even if the company cuts its capital expenditure in half, it may still be looking at cash outflow of around $-615 million. Fortunately, it has strengthened its liquidity position this year. At the end of March 2020, it had nearly $1.1 billion in cash. In June, it announced that it is looking to raise additional debt, primarily to refinance its existing loans. On top of that, analyst expectations suggest nearly a 10% decline in revenue for US Foods this year which would mean a much lesser cash burn.
To sum it app, it is not easy for companies that operate on thin margins to navigate demand shocks. However, US Foods can very well do that. This may be a good time to invest.